Review of all things Real Estate:

Among home shoppers who thought 2022 would be their year, a pervasive sinking feeling is taking hold. They’re realizing the monthly payment for a home they thought they could afford is now hundreds (or even thousands) of dollars more than they would have paid earlier this year. Their home purchase dream is getting further and further out of reach.

The reasons? Rapidly rising mortgage interest rates and inflation!

These higher rates have wrought pain on the housing market, already showing up in the high numbers of buyers who can no longer qualify for a mortgage. In turn, frustrated sellers are reducing prices, but sales aren’t happening; consequently home sales are dropping and existing homes are sitting on the market.

Most realized that rising mortgage rates were going to mean higher monthly payments; but by how much? To give prospective homebuyers a road map to what’s going on, mortgage experts crunched numbers to find out how much turmoil each mortgage rate increase will have on homebuyers. How much will each percentage point increase the mortgage rate? And how much more do households need to earn to make monthly payments on a new home?

Higher mortgage rates affect affordability much more than most people realize. When interest rates are raised or reduced by 1%, buying power decreases or increases by about 12% according to mortgage experts. In January 2021, buyers spent about 20% of their income upon becoming homeowners, currently it's nearly 40%, the highest it’s been since 1984.

To arrive at these findings, the monthly mortgage payment for a median-priced home with a 6.7% mortgage rate on a 30-year fixed loan was calculated. Payment includes taxes and insurance and assumes buyers put down 10%. The assumption is also that homebuyers are spending no more than the recommended max of 30% of their gross income on housing.

Mortgage rates have more than doubled since the start of the year, rising from the low 3% range to nearly 7% for 30-year fixed rate loans. That means buyers need a six-figure household income of about $124,000 to buy the median priced home of $427,250 (September data) while just a year ago, when rates were around 3%, buyers needed to earn about $89,000. If rates go up to 8%, (which many real estate experts are predicting), buyers will need an annual household income of $137,356 for a median-priced U.S. home. At 10%, they would need to bring home nearly $160,000 a year; meaning that the median-priced home would be accessible to only about 1 in every 6 U.S. households.

Economists say home prices are roughly 35% higher than what current incomes should support. For the housing market to come back into balance, a combination of mortgage interest rate reductions, home price adjustments and higher incomes are required, which could take years.

Rates could continue to rise which will make it even more challenging for already stretched buyers. Some economists and mortgage loan specialists indicate that we could see 7.5-8%, within the next six to eight months; and most don’t see rates coming down anytime soon.

This doesn't mean that those who desire to purchase homes won't be able to do so though. Remember, even in the days of mortgage interest rates and inflation in the high teens during the Carter years; people still bought and sold real estate because life events continued to happen. People get married, get divorced, have babies, there are household deaths, job transfers, and/ or health issues resulting in the need to upsize and/or downsize. Life still happens in all kinds of real estate markets and housing is essential; so, the industry will find a way to meet the need.

Buyers trying to qualify for a loan find that increasing their down payments will decrease the monthly payments, perhaps bringing on co-signers/co-buyers will help achieve those goals. Adjustable-rate mortgages where the interest rate is lower for a set period of years in the beginning of the loan and then readjusts later can help buyers get into their house before prices inevitably go up.

Interest only, negative amortization and/or reverse mortgage loans are tools that might prove useful. Negotiation with sellers to provide credit to buy down buyer’s interest rate is beneficial. Note: inflationary pressures coupled with very low unemployment will drive wages and salaries upward, meaning that there should be encouragement for home buyers on the horizon.

The solution occurs when buyers sit down with their real estate agent and their trusted loan officer. Discuss requirements, location, and mortgage options/ affordability; then strategize! People who do that should still be able to make their home purchase work.