Interest Rate Increases Mean Less Home for Your Money

interest rate increases

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Credit Sesame’s analysis confirms that higher inflation resulting in interest rate increases is hitting Americans where they live – literally. Fast-rising prices push interest rates up and higher mortgage rates are already impacting the housing market.

In real estate, people often talk about either a “buyer’s market” or a “seller’s market.” Higher mortgage rates lead to neither. They are an economic force that hurts both buyers and sellers.

Credit Sesame took a look at the recent trend in mortgage rates, and how it’s affecting the housing market.

A Sharp Rise in Mortgage Rates

30-year mortgage rates have risen by 2 full percentage points just since the start of 2022, according to mortgage finance company Freddie Mac. 15-year mortgage and adjustable rate mortgage (ARM) rates are also up sharply so far this year.

The interest rate increases trend has accelerated over the past couple months. 30-year rates have risen for seven consecutive weeks, for a total increase of 1.35% during that period.

This leaves 30-year mortgage rates at 5.11%, their highest level in over a decade.

Impact of Interest Rate Increases on Buying a Home

The market has seen mortgage rates this high – and much higher – before, but what’s truly disruptive to the plans of home buyers in 2022 is how quickly rates have risen.

Consider the experience of a typical home buyer who started looking for a home just before that recent seven-week stretch of mortgage rate increases began.

According to the Federal Reserve Bank of St. Louis, the average sale price of a home in the U.S. is currently $477,900. In early March, when 30-year rates were at 3.76%, with a 10% down payment you could have bought a house at that price with a monthly principal and interest payment of $1,994.35.

Just seven weeks later, with 30-year mortgage rates now up to 5.11%, that same monthly payment with a 10% down payment would only buy you a house worth $408,000. In summary,

  • $1,994.25 per month purchased a $477,900 home in early March 2022
  • $1,994.25 per month purchases a $408,000 home in late April 2022

In other words, if you had started your home search in early March by using a mortgage calculator to figure out what you could afford, just seven weeks later you’d have to lower your target price by nearly $80,000 to maintain the same monthly payment.

Alternatively, to afford that same average-priced home of $477,900, with a 10% down payment and a 5.11% 30-year mortgage, you’d now be facing a monthly principal and interest payment of $2,337.92.

That would represent a 17.2% increase in your planned monthly payment in just seven weeks – a massive rate of inflation for what would probably be your largest monthly expense.

Interest Rate Increases Create Lose-Lose Situation

It’s easy to see how fast-rising mortgage rates are disruptive to the plans of home buyers. Not only is the cost of buying a house rising, but mortgage rates are changing so quickly it would be difficult to shop for a house. When your target price becomes a moving target, it’s tough to know which properties you should be looking at.

While higher interest rates clearly hurt buyers they can also be bad for sellers as well.

As mortgage interest costs rise, less of what buyers pay goes towards the price of the home because more of each payment is taken up by interest. This puts downward pressure on prices and discourages home buying demand.

A survey by the Mortgage Bankers Association found that for the week ending April 15, 2022, purchase mortgage demand was down 3% in just a week, and down 14% over the past year.

In short, it’s getting tougher both to buy and to sell a home. Even home owners who aren’t looking to sell aren’t immune to the impact of rising interest rates.

Higher rates limit refinancing opportunities. The Mortgage Bankers Association found that the volume of refinance mortgages had fallen off even more sharply than that of purchase mortgages.

Refinancing mortgage volume dropped 8% in the latest week, and was off 68% over the past year.

Should Consumers Consider ARMs?

At their peril.

One other interesting tidbit from that Mortgage Bankers Association survey: as a percentage of overall mortgage volume, ARMs (adjustable rate mortgages) reached their highest level since 2019.

On the surface, the renewed interest in ARMs is easy to understand for two reasons. First, ARM rates are lower than either 30-year or 15-year fixed mortgage rates. Second, they haven’t risen as sharply this year as fixed rates.

However, the short-term benefit of an adjustable rate loan may turn out not to be worth the long-term cost if mortgage rates continue to rise.

ARMs offer a low initial rate, but then are adjusted up to market levels. If mortgage rates have continued to rise, people with ARMs may regret not having locked in a fixed rate.

Not only could they see their mortgage payments rise, but home owners with ARMs have to deal with the uncertainty of having those payments vary over time. This can make it very difficult to set a reliable household budget and make long-term financial plans.

Renting Is No Bargain Either

With all the perils that interest rate increases present to home buyers, you might think that the safest thing to do is continue to rent for the time being.

However, that’s also getting more expensive.

As part of its annual Survey of Consumer Expectations, the Federal Reserve Bank of New York conducts a housing survey that measures expectations for the year ahead.

This survey found that households expect rents to increase by 11.5% over the year ahead. A year earlier, the average expected rent increase was just 6.6% so consumers expect the pace of rent hikes to accelerate.

Since housing is a necessary expense, higher rents and mortgage rates may be hard for many consumers to avoid. The best defense is to keep other forms of debt low, so higher interest rates don’t eat any further into your budget than necessary.

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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