The Future of Homebuying: How Mortgage Rates Impact Affordability
House for sale. (Artur Widak/NurPhoto via Getty Images)
Potential U.S. home buyers and sellers have kept a sharp eye on mortgage rates, which have contributed to the affordability crisis in the market. Today, mortgage rates are more than double what they were in 2021 and are sidelining many people from the market, including sellers who locked in lower rates during the COVID-19 pandemic.
And while buyers and sellers are both waiting for rates to fall, Telsey Advisory Group Senior Managing Director Joe Feldman and Realtor.com senior economist Ralph McLaughlin say affordability will still be an issue in the long run.
What this means:
When borrowing rates come down, it means buyers have more money that they can borrow. In other words, they have more purchasing power.
"They can actually pay more for a home than they otherwise would," McLaughlin said, adding that "when they go to bid on a house… they can bid up to price more than when mortgage rates were higher."
That leads to price growth in the market, but that doesn’t happen right away. Although buyers can borrow more, they typically won’t unless there are a lot more buyers, or competition, in the market, according to McLaughlin.
The issue is that a decline in mortgage rates will eventually drum up that demand, "resulting in upward pressure on home prices and impacting affordability," Feldman said.
Affordability still an issue
Mortgage rates have been falling, though they haven’t dropped below 3% since November 2021. Last week, the key 30-year fixed-rate mortgage averaged 6.49%, according to data from Freddie Mac.
On top of that, home prices are also still near a record high. According to data from Redfin, the median sale price rose 4.1% year over year in July to $439,170. That’s only 0.7% below the all-time high of $442,389 set the prior month, according to Redfin.
In order to really make homes more affordable, McLaughlin said there needs to be a lot more homes on the market, or income growth needs to outpace home price growth.
Conclusion
In conclusion, the relationship between mortgage rates and affordability is complex and influenced by various factors. While a decline in mortgage rates can make housing more affordable in the short term, it can also lead to increased demand and higher prices in the long term. For homebuyers, it’s essential to understand these dynamics and consider how they may impact their ability to purchase a home.
Frequently Asked Questions
Q: What happens when mortgage rates decrease?
A: When mortgage rates decrease, buyers have more money to borrow and can potentially purchase more expensive homes.
Q: Why do declining mortgage rates not always lead to increased affordability?
A: Declining mortgage rates can lead to increased demand and higher prices, offsetting the benefits of lower borrowing costs.
Q: What is needed to make homes more affordable?
A: There needs to be a significant increase in the supply of homes or a substantial increase in income growth to outpace home price growth.
By understanding the interplay between mortgage rates and affordability, homebuyers can better navigate the complex and ever-changing housing market.
