Homebuyers Face Major Challenges as Mortgage Rates Continue to Rise

Homebuyers Face Major Challenges as Mortgage Rates Continue to Rise

Things just got even tougher for homebuyers.

Homebuyers Face Major Challenges as Mortgage Rates Continue to Rise

    Homebuyers have faced many challenges in finding affordable housing over the past two years. With prices rising and a limited supply of houses on the market, many buyers have been forced into stretching their budget, agreeing to terms that are more favorable for sellers (like buying a home with no inspection), or quick decisions to avoid missing opportunities.

    Although these challenges have made the process of buying a home more difficult, low mortgage rates have been among the few positives for homebuyers, However, that is changing.

    At the time of this writing, mortgage rates have risen to their highest level in over three years—and all signs point to continual increases throughout 2022.

    Rates that were already low were slashed even further after the pandemic hit in early 2020, which helped to fuel the hot real estate market of 2020-2022. Now, as interest rates increase, the impact of significantly higher home values is hitting buyers even harder. Heading into spring, which is typically a busier season for home sales, buyers are likely to face even more difficulty in finding available, affordable housing options.

    According to the National Association of Realtors, the median selling price of an existing home rose 15.4% from January of 2021 to January of 2022. During the same timeframe, available homes for sale dropped by 16.5% (source).

    With inventory at an all-time low, prices are expected to continue to rise, although in the single digits instead of double digits. Danielle Hale the chief economist for Realtor.com said, “Prices will continue to grow, just at a slower pace.”

    Part of the reason why the growth of home prices is expected to slow down is related to the rising mortgage rates. As Hale pointed out, “Higher mortgage rates decrease affordability for anyone taking out a mortgage,” which is most people who are buying a home.

    While rising mortgage rates and higher monthly payments typically decrease the demand from buyers, so far, the opposite has been true. Although rates have already increased significantly, homebuyers expect that rates will continue to increase throughout the year, so many are rushing to lock in their rates before any additional increases. According to Hale, “It gives shoppers some urgency to close sooner rather than later.”

    Desmond Lachman, a senior fellow at the American Enterprise Institute explained in an article published by the Washinton Examiner that mortgage rates typically closely follow the yield on 10-year Treasury notes. The 10-year Treasury rate is currently around 2%, up from 0.5% where it bottomed out during the pandemic.

    Lachman pointed out that rates are likely to continue to increase by saying, “The theory is that because the Fed is so far behind the curve ... they’re going to have to raise interest rates a whole lot more.”

    The Fed is expected to increase interest rates a few times in 2022, although specifics remain unknown. As a result, homebuyers will be able to afford fewer and fewer homes as the year progresses.

    Although the demand from homebuyers is still much higher than the supply of homes for sale, it seems that part of the demand is based on a rush of buyers attempting to beat further increases in interest rates. At some point, this is likely to slow down.

    Ultimately, the housing market needs to experience an increase in supply. Lawrence Yun, chief economist of the NAR, said, “We need a supply of empty homes.”

    How does all of this impact potential homebuyers? For now, the supply continues to be low and prices are still increasing, albeit at a slower rate than 2021. Mortgage rates have already risen enough that it will make a considerable difference in terms of the houses that are affordable. And just as significantly, interest rates and home prices are expected to continue to increase throughout 2022.

    Even if the supply of available homes for sale increases, homebuyers are likely to face serious challenges in finding suitable and affordable housing.

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    Jared Hargrove

    12 posts

    Jared is a personal finance nerd that believes in a world where the pursuit of financial independence and avocado toast can live together peacefully.