Photo: Robert Clark
US homebuyers can’t seem to catch a break — while home price growth is finally slowing, interest rates are now climbing at an accelerated rate.
Interest rates have been rising twice as fast as home values since the start of 2018, and according to a new report by the listing site Zillow, the increases will cost buyers close to $1,400 per year.
Over a long period of time, rising mortgage rates can weaken demand — especially in the entry-level market where inventory is scarce. And less demand translates to weak to moderate price appreciation.
“Mortgage rates are still near historic lows, and are well below where they were prior to 2010. Rising rates do affect housing affordability, particularly in the nation’s priciest markets or for people who are already financially stretched, but overall, mortgage payments are still more affordable than they were historically,” Zillow senior economist Aaron Terrazas tells Livabl.
At the national level, the median home price has risen 6.5 percent annually to $216,700, while at the same time interest rates rose 15.4 percent. Annual home price appreciation peaked at 8.2 percent in March 2018.
The slowing pace should be an advantage for buyers, but the rapid increase in mortgage rates is working against the benefits of a slightly cooler market as loan payments continue to climb. These higher mortgage payments reflect the combination of both increased home values and the higher interest rates for buyers.
Higher interest rates are responsible for nearly two-thirds of the increase in buyers’ monthly mortgage payments compared with what those costs would have been a year ago if home values remained at their current level.
“Home buyers and sellers have become accustomed to low rates, and there will be a bit of an adjustment period as the market adapts,” says Terrazas.
Since the start of 2018, mortgage rates have steadily climbed from the historic lows they were at or near for much of the past decade. The average mortgage rate in January 2018 was about 4 percent and hit 4.9 percent in the last week.
According to Zillow, a one percentage point increase to the current rate translates to about $1,200 more per year in mortgage payments for the typical home at its current value — even if home prices had remained constant.
The strong economy could be pushing rates upward. The Federal Reserve raised rates three times in 2018, and as many as five more increases are forecasted through the end of next year.
In pricier markets, the cost of the rate increases can add up to thousands.
For example, buyers in San Jose, California — one of the priciest US markets — will see the biggest impact on their monthly mortgage. Monthly mortgage payments on the typical San Jose home are now $1,300 higher than they would have been a year ago — meaning buyers will be spending about $15,500 more per year. That’s nearly 10 times larger than the nationwide increase.
Meanwhile, stagnant wage growth continues to be a factor for many would-be homebuyers. In the third quarter, national wages grew a lackluster 3.3 percent year-over-year, according to newly released data from the Bureau of Labor Statistics. At the same time, home prices and interest rates at substantially faster paces.
“The combination of higher interest rates and home prices made mortgage payments about 15 percent higher than they were a year ago. This disparity not only makes mortgage payments more of a financial burden, but saving up the initial down payment is harder as home value appreciation itself is outpacing wage growth,” says Terrazas.
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