Decade-high mortgage rates threaten spring housing market

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U.S. home sales are heating up again this spring, but the highest mortgage rates in more than a decade threaten to slow the pace of sales that has gripped the market for nearly two years.

Home sales rose last year to their highest level since 2006 as the Covid-19 pandemic shifted consumer housing priorities and remote working allowed people to get away from work .

While record home prices and the record inventory of homes for sale pushed many potential buyers away, intense demand kept activity at historically high levels.

Now, with borrowing rates hitting 5% for the first time since 2011, homes may be getting too expensive for prices to rise so quickly.

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“We’ve never seen a time when mortgage rates have risen so quickly and the market hasn’t cooled,” said Ralph McLaughlin, chief economist at Kukun, a real estate data firm. “I don’t expect the market to collapse in any way, but it will definitely go from a gangbuster market to one that hopefully looks more normal.”

Spring is usually the busiest time of year for home sales. The weather is improving and many families want to move before the start of the school year. About 40% of annual sales take place from March to June, according to the National Association of Realtors.

A “For Sale” sign in front of a home in West Palm Beach, Florida, U.S., Wednesday, April 7, 2021. (Marco Bello/Bloomberg via Getty Images/Getty Images)

This spring also promises to be busy compared to winter. Many buyers have been looking for a home for months or are considering returning to the market after failing to find something to buy last year.

But this year appears to be less competitive than last spring, when homes soared off the market as buyers rushed to take advantage of ultra-low interest rates.

Today, mortgage rates are rising at their fastest pace in 35 years, making home purchases much more expensive than just a few months ago. The average rate on a 30-year fixed-rate mortgage rose from 3.22% in early January to 5% on Thursday, according to mortgage finance giant Freddie Mac.

The increase can increase a homeowner’s monthly borrowing costs by several hundred dollars when the cost of everything from gas to groceries also increases.

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A 5% rate on a $300,000 loan would create a monthly payment of about $1,610, excluding taxes and insurance, according to LendingTree Inc., an online lending information site. At 3.04%, where the average mortgage rate was a year ago, the monthly payment would be $1,271.

Koray and Piril Guleyupoglu placed offers on 10 homes for several months before pulling out of the housing market in March. The couple, who have a 4-year-old daughter, were looking to buy a house in northern New Jersey.

“It looks like it’s just kind of a frenzy,” Mr Guleyupoglu said. “Although I don’t want to rent, because we really want to own our own place, I don’t think I have any other choice, because I also think everything is too expensive at the moment.”

A For Sale sign is displayed in front of a home in Washington, DC on March 14, 2022. (Photo by STEFANI REYNOLDS/AFP via Getty Images/Getty Images)

Less than a quarter of consumers surveyed by Fannie Mae in March said now was a good time to buy a home, down from 53% a year earlier and a record high in data dating back to mid-2010.

The first signs of slowing demand are appearing around expensive coastal cities such as Los Angeles, Seattle and Boston, among the first markets to calm down, real estate brokerage Redfin Corp said. earlier this month.

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Still, some real estate agents say a dip in buyer activity over the next few months would only cool the market moderately. About 25% of existing homes purchased in February were purchased with cash, according to NAR. And households moving from high-cost areas to more affordable areas may be less affected by rising mortgage rates.

“If half of our buyers were shut out of the market, we would still have eight buyers for each listing,” said Nick Painz, chief broker at Re/Max Alliance in Westminster, Colorado, a suburb of Denver. “People who think it has to stop somewhere, I think they’re going to have a rude awakening.”

A “House for Sale” sign in Louisville, Kentucky, U.S., on Tuesday, October 26, 2021. Photographer: Luke Sharrett/Bloomberg via Getty Images (Luke Sharrett/Bloomberg via Getty Images/Getty Images)

Many buyers are looking to buy before interest rates rise further. Jeanette Chalgren, 32, started house hunting last year, hoping to buy her first home before her lease ran out in March. “I didn’t want to wait too long because I was aware that interest rates were going to go up this year,” she said.

Ms Chalgren bought her house in Robbinsdale, Minnesota, in February for $323,500.

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Even if higher rates dampen demand, it can take sellers months to cut prices as their homes linger on the market, said Lawrence Yun, chief economist at NAR.

“The first few months of the rate hike, we actually don’t see much change in the intensity of buyers,” he said. “But inevitably there will be a shrinking pool of buyers.”

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