Cooling of high housing rates with high mortgage rates | News Sun

For those who are still looking for a home of their own, the search is becoming more expensive than it has been in a long time.

Yes, home prices continue to rise as buyers fight for tight inventory and engage in bidding wars to try to get into the few homes available on the market. Inflation has also pushed up the cost of building materials and labor, making new construction even more expensive.

But now buyers are grappling with another factor that hasn’t been the case for quite some time – rapidly rising interest rates.

In an effort to curb rising inflation, the Fed has raised its core interest rate faster, a move that has directly impacted mortgage costs by combining higher asking prices with higher borrowing costs.

The final result? Housing is probably cheaper than it has been for more than ten years.

Property prices have been rising steadily for years as sellers compete for low inventory. This has made housing less affordable for some time – prices are up 8% year-on-year last year – and something both buyers and sellers are keenly aware of.

Part of the reason prices have been able to keep going up is because credit has been so cheap. Even with asking prices inflated, even lower-income buyers could make it work with bargain-basement interest rates.

Well, not so much.

The average interest rate on a 30-year mortgage in the US has more than doubled in the past 18 months and is now at its highest level since the epic housing crash that burst the subprime mortgage bubble in 2008.

Mortgage rates on a 30-year loan averaged 5.7% in the week of June 30, according to Federal Reserve Economic Data. The last time interest rates were this high was on November 26, 2008, when interest rates averaged 5.97% before the market tanked.

Mortgage rates started 2022 at 3.22% and had hit a 50-year low of just 2.65% in January 2021.

This sudden rise in interest rates had an impact on homebuyers almost immediately.

Larry Doyle, President of Campbell & Fetter Bank, ran some sample numbers to illustrate.

Doyle ran the numbers for a $300,000 home — a price chosen because it’s the high end for homes being built as part of Kendallville’s new Noble Creek subdivision — considering a mortgage with a typical deposit of 20%.

“I was looking at $240,000 at a 30-year payback of 3.25% because back then, say at the beginning of the year or so, that was on the order of where the 30-year rates were. The principal and interest payment on that $240,000 at 3.25% is $1,044 (per month). Today, if you say some sort of current interest rate on a 30-year mortgage, if you say 5.5%, you’d be close — maybe a hair over a hair below on any given day, close enough for this discussion — $1,362.

“That’s an increase of $318. Same dollar amount. Same dollar amount borrowed,” Doyle said.

Doyle said banks would typically appreciate borrowers spending no more than 25% of their gross monthly income on those mortgage payments. This increase in costs due to the rise in interest rates alone can significantly affect a person’s purchasing power.

“Assuming an increase of $300 a month, all else being equal, you either have to buy fewer houses or you have to have $1,200 more income a month to stay at that ratio,” Doyle said.

However, this 25% rate only applies to the mortgage payment. Banks also look at other borrower expenses — auto loans, credit card debt, personal loans, student loans, child support payments, etc. — and try to keep that burden below about 40% overall.

And the above numbers, if a buyer can match a 20% down payment, are a big challenge for many first-time buyers who will struggle to transfer tens of thousands of dollars before going to market, Doyle said.

In Noble County, where the average household income is just under $60,000 a year, 25% of their gross monthly income would be $1,250, making this $300,000 home with a $1,362 mortgage payment unaffordable.

Because typical household incomes in Northeast Indiana are in the Noble County range, buyers in the area may soon find that many homes over $200,000 are outside of their price range.

It’s already starting, said Mark Bock, managing broker for Mike Thomas Real Estate in Angola and LaGrange.

“Many of the buyers — particularly the lower-priced buyers, first-time home buyers, or lower-priced buyers — are struggling because some of them are simply being pushed out of the market,” Bock said. “That becomes a problem because they usually buy the houses that people move out of. With this slowdown, this affects the mid tier. What we are seeing right now is a slowdown.”

The rising cost of borrowing is pretty obvious as Bock said he saw something happening in the market that hasn’t happened in years:

“We’ve had nine price drops (recently) and we haven’t seen a price drop in our market for several years. It just didn’t happen in general,” Bock said. “The sellers who were aggressive or who are aggressively priced pushed out of the market.”

With the credit market shock only appearing in the last six months, it is too early to say what the impact will be. But it’s already playing a role in the near term, and Bock is confident enough to say that the annual rise in house prices is likely to come to a halt.

“We have reached a leveling phase. So I don’t think we’re going to have the appreciation, the 8% that we had last year. We won’t have that this year,” said Bock. “Home appreciation, or inflation, has stagnated, which is probably a good thing for buyers.”

That’s not to say the market will suddenly collapse. Bock notes that the nation still has a housing deficit of more than 5 million homes.

Demand still exceeds supply many times over, but rising borrowing costs could help reduce the imbalance.

“I think people want what they want and as long as interest rates and house prices remain affordable enough for individual borrowers, we will continue to see local activity in the housing market, particularly where we have a shortage of available housing.” New construction still seems to be in high demand and our community is fortunate to have many talented builders. As a local portfolio lender that originates one-off home loan deals, these applications remain very strong in our current loans,” said Scott Gruner, President of Angola’s First Federal Savings Bank.

Buyers are currently being hit by sticker shock, but both real estate agents and lenders have realized two things – first, that markets are cyclical, so there are ups and downs, and second, despite recent increases, borrowing is relatively weak where still cheap prices have historically been.

“We have just witnessed an historic long-term low interest rate environment. Because of this, many borrowers, especially younger customers, have never seen interest rates at these current levels, although they are still historically low,” Gruner said. “When I started in banking in 1998 interest rates were around 6% and I personally have never seen them reach that level until now as they are approaching 6% again. So I think it’s really a matter of perspective. Our older borrowers think about interest rates in the 1980s when they were 15%, for example, and still think those rates are a bargain today.”

In the early 1970s, mortgage rates hovered around 7.5% before skyrocketing during a period of high inflation during the Jimmy Carter presidency, finally reaching a record high of 18.44% in October 1981.

Mortgage rates fell, rose again to about 14.5% in 1984, fell to about 9% in early 1987, but rose again to about 11% by the end of the year.

Interest rates fall to 7% by 1993 and then saw a last big rise to over 9% by late 1994.

Since then, mortgage rates have been falling for the long term, with some spikes up and down over the years, but have been steadily declining for the past 30 years. This year’s surge is arguably the biggest surge the credit market has seen in three decades.

Because first-time buyers are typically in their 20s and 30s, what is “high” for them is actually lower than what used to be “normal” for their parents and grandparents.

“When I launched this in 1978, the interest rate was 17.5%,” Bock said. “It could be much, much worse. Over 50% of real estate agents operating today have never experienced a market shift. I went through four of them.”

Nevertheless, the short-term interest rate hikes will inevitably cool the real estate market. And that’s what it’s all about, Doyle said, when the Fed raises interest rates to make money more expensive, cool demand, and help slow or halt the inflation that’s rattling the US economy.

Housing affordability will also take a shot in the near term until more time, incomes respond and the elevated interest rates people are now seeing become the new normal, Doyle said.

“There is no doubt that the price of existing or new houses exceeds people’s income. There’s no doubt about it,” he said.

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