Soaring Mortgage Rates Make Homeownership a Pipe Dream for Many Americans

Mortgage rates are inching closer to 8 percent, according to the latest data from lender Freddie Mac, as they rose for the fifth consecutive week, increasingly making the dream of homeownership out of reach for huge swaths of Americans.

The popular 30-year fixed-rate mortgages have soared to about 7.6 percent, the highest level in more than two decades. The 15-year rate is close to 7 percent, also the highest it’s been in 20 years, according to the home lender.

The continuing surge of mortgage rates has stifled the demand for home purchases.

“For the fifth consecutive week, mortgage rates rose as ongoing market and geopolitical uncertainty continues to increase,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “The housing market remains fraught with significant affordability constraints. As a result, purchase demand remains at a three-decade low.”

housing market
Farmland is offered for sale for new home construction in Hawthorn Woods, Illinois. As potential homebuyers continue facing heightened mortgage rates, new construction could increase supply and help lower prices.

The rise in mortgage rates has come on the back of the Federal Reserve hiking rates to 5.25-5.50 percent, a two-decade high, to battle inflation that had skyrocketed to historic levels. As a result, borrowing costs have also elevated, hitting consumers and their ability to get affordable loans, including mortgages.

Analysts say that it’s the worst time to afford buying a home in the last 15 years. Buyers earning a median income—around $79,000—who can cobble together a 10 percent downpayment for a new house that costs about $350,000 would be forced to spend 40 percent of their income to make the monthly payments, according to real estate platform Zillow.

Finance experts have long advised households to spend no more than 30 percent of their income on housing costs to avoid the phenomenon known as being “house poor.” This is when a majority of household costs go toward paying a mortgage and leaving little to spend on other expenses.

To be able to afford a home at that level, a potential buyer would need to make at least $107,000, according to Zillow senior economist Nicole Bachaud.

“If mortgage rates rise to 8 percent, that income needed to afford the typical U.S. home would rise to nearly $114,000,” Bachaud wrote this week.

For those potential buyers who can manage to raise a 20 percent downpayment, an 8 percent mortgage rate would demand that they make at least $95,000.

That type of income is beyond the pocketbooks of most of Americans. In 2022, the average median household income was nearly $74,600, according to data platform Statista.

High mortgage rates have also forced sellers to stay put in homes that they bought during periods of low borrowing costs. This has also meant that there is a limited supply of homes for sale, increasing competition, which in turn has led to high prices.

All Is Not Lost for Buyers

Bachaud pointed out that it’s not a guarantee that rates will soar to 8 percent.

“The safest bet is that rates will remain volatile, and that they will stay high for the foreseeable future,” she wrote.

But it may not be all doom and gloom for prospective buyers. As fall begins in earnest, prices may come down to give some hope to those who can make their budget work to afford the high-rate environment. There are also reports of new construction that could increase the supply of homes and help lower prices.

“More homes means less competition for each home, which reduces pressure on prices, and builders often have flexibility to offer creative financing options like rate buydowns to help make the math work for buyers,” Bachaud wrote.

“Ultimately, building more homes to fill the housing shortage is the only sustainable way to improve affordability and give more people access to homeownership,” she added.

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