Higher mortgage rates make things even harder for homebuyers

First-time home buyers, already beset by bidding wars, now face a potential blow: higher mortgage rates.

30-year loan costs hit a more than two-year high of 3.69% last week, rising about 20% just since Christmas. Further hikes are expected as the Federal Reserve, trying to rein in inflation, raises its benchmark rate. It’s a daunting prospect for first-time buyers when affordability is already at its worst since 2018.

The pandemic housing rally is heating up again as the key spring selling season approaches, threatening to push new buyers beyond what they can afford. Their low incomes put them at a disadvantage when competing with older people who are downsizing and single family owners for the same moderately priced homes. Soaring borrowing costs sap their purchasing power, preventing them from bidding high enough to stand a chance.

“Housing affordability is about to be crushed,” said Mark Zandi, chief economist at Moody’s Analytics, who expects 30-year rates to top 4% this year.

“Many potential first-time home buyers will be locked out of home ownership, at least until home prices come back to earth or mortgage rates come back down,” he said. “Neither seems likely, at least not soon, and certainly not in time for the critical spring home-buying season.

Cassie Homan, a single Philadelphia tenant in her 40s, scours listing websites every day, looking for a modest place to live in suburban New Jersey to be closer to her family. She has a month-to-month lease to stay flexible. But in its sub-$200,000 budget, homes go fast unless there’s something serious going on.

She recently inquired about a renovated two-bedroom house built in 1855 with an asking price of $140,000. But he was gone before she could see him, attracting three cash offers in two days. She considered another house only to find that the seller was passing off the attic as a bedroom. A third property – listed without any photos – was closed to viewing because a tenant lived there.

Homan said she hopes rising interest rates will drive prices lower, opening up more inventory. Other than that, “I’m screwed – I don’t stand a chance in hell,” she said. “I’m going to have to rent for the rest of my life.”

Rising rates, at least in the short term, are helping to reduce inventories even further. Homeowners are less and less willing to move because they would have to give up their old cheaper mortgage and take out a more expensive one to buy a new home. This leaves fewer entry-level properties on the market.

And single-family rental companies picking up homes in the thousands will continue to buy because they aren’t dependent on mortgages, said Scott Buchta, head of fixed-income strategy at Brean Capital in Franklin, Tenn. This will continue to reduce supply, especially in markets where companies are most active, such as Atlanta, Phoenix and Nashville.

Sherry Bailey, an agent in Atlanta, said her buyers consistently lose out to big landlords who pay cash.

Bailey works with a young woman with a government job and a budget of less than $200,000 who was forced to search the mountain towns of North Georgia, an hour and a half from Atlanta. Yet, during the time it takes for the client to discuss the possibilities with her mother, competitors are rushing in, Bailey said.

“The spring market hasn’t even started,” she said, “and buyers are already discouraged.”

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