Rising Mortgage Rates Add to the Challenge of Buying a House

Home prices remain high, and rising borrowing costs are adding to the challenge of buying a home heading into the traditional spring selling season.

The pace of housing price increases may slow from double- to single-digit percentages this year, said Danielle Hale, the chief economist for Realtor.com. But prices are still expected to go up, and conditions will probably continue to favor sellers.

“Prices will continue to grow, just at a slower pace,” she said, and one of the main reasons is that mortgage rates are expected to rise. “Higher mortgage rates decrease affordability for anyone taking out a mortgage,” which the majority of home buyers do, she said.

The average rate on a 30-year, fixed-rate mortgage this week rose to 3.92 percent, the highest rate since May 2019, according to the mortgage finance giant Freddie Mac. A year ago, the average rate was 2.81 percent. Freddie Mac’s weekly survey looks at loans used to buy homes, rather than at borrowers refinancing loans they already have.

Mortgage rates are rising quickly. The Mortgage Bankers Association forecasts average rates will be slightly above 4 percent by the end of the year — still low in historic terms, but higher than the 3 percent or lower that borrowers have been seeing. (The association includes rates for refinances as well as purchases in its forecast.)

Why are rates rising? In response to higher inflation and a strong employment market, the Federal Reserve is expected in March to begin a series of increases in its benchmark interest rate, indirectly helping to push up mortgage rates. (In general, mortgage rates are tied to the 10-year Treasury bond, which is affected by various factors, including the outlook for inflation.) Consumer price increases recently have reached levels not seen in 40 years, mainly because of lingering supply constraints from the pandemic.

The average borrower with a 20 percent down payment would pay about $100 more a month on a new mortgage than one taken out at the end of last year because of rising rates and higher home prices, said Andy Walden, vice president of enterprise research strategy at Black Knight, a mortgage data provider.

Rates are rising as strong demand for homes, along with a tight supply of properties for sale, has pushed up home prices. The typical sale price of a previously owned home in 2021 was just under $347,000, according to the National Association of Realtors — an increase of nearly 17 percent from 2020.

Shoppers should still expect a competitive spring housing market, Ms. Hale said. Some potential buyers who have been on the fence may move quickly to lock in mortgage rates before they rise further. “It gives shoppers some urgency to close sooner rather than later,” she said.

But some shoppers — particularly first-time buyers — may decide to wait until even higher rates help cool off prices later in the year. The largest share of home buyers are millennials ages 21 to 40, many of whom are first-time buyers, according to the National Association of Realtors.

“The spring season will be very interesting,” said Lawrence Yun, the chief economist with the Realtors association.

Ultimately, the housing market needs an increase in inventory, Mr. Yun said. “We need a supply of empty homes.” Builders have faced challenges in keeping newly built homes affordable including high lumber prices and difficulty finding construction workers.

Buyers may need to consider more affordable homes in less urban areas, Mr. Yun said. That may depend on whether homeowners expect to be able to continue working remotely.

One variable in the number of homes for sale is the winding down of mortgage forbearances granted during the pandemic. Many homeowners have been able to resume payments after their payment pause expired. But some may be unable to, forcing them to sell their homes, said Michael Fratantoni, the chief economist with the Mortgage Bankers Association. The number of borrowers in forbearance has been declining, to an estimated 705,000 homeowners at the end of 2021.

As always with real estate, conditions vary. Agents in some hot markets say a rise in interest rates may take time to affect prices because some buyers don’t need financing to purchase homes. Kyle Schelvan, an agent with the Asa Team, part of eXp Realty, in Orlando, Fla., said homes in the area often were bought by people who had sold homes elsewhere and were using their cash proceeds to buy homes in Florida. Traditional buyers sometimes must take steps they once would have considered preposterous, he said — like buying a home occupied by a renter and waiting months for the lease to expire so they can move into the property. “It’s challenging,” he said.

Here are some questions and answers about mortgage rates and the housing market:

As mortgage rates rise, should I consider an adjustable-rate home loan?

Adjustable-rate mortgages, or ARMs, offer a fixed interest rate for a certain period before switching to a variable rate. The loans earned a bad reputation in the housing crisis in 2008 because some lenders gave them to unqualified buyers who couldn’t afford the higher payments when interest rates spiked. Lingering skepticism about adjustable loans, combined with low rates on fixed-rate mortgages in recent years, has kept ARMs out of favor, said Mr. Walden at Black Knight.

ARMs make up about 4 percent of the mortgage market, down from more than a third in 2005, said Mr. Fratantoni of the Mortgage Bankers Association.

Now, however, some home buyers may find ARMs attractive again, said Melissa Cohn, a regional vice president with William Raveis Mortgage who focuses on lending in the Northeast and Florida. The loans now offer more protections, she said, like longer periods before their rates can rise — five to 10 years — and caps on maximum rate increases.

“It’s time to shift gears,” she said. Recently, she said, she helped clients get a 30-year ARM offering a fixed rate of 3 percent for 10 years.

What is a typical down payment for a home purchase?

Home price increases over the past few years have made saving a down payment more challenging, but the amount of cash required upfront is often less than the traditional rule of thumb of 20 percent. In 2021, the typical down payment for repeat home buyers was 17 percent of the purchase price, according to the National Association of Realtors. For first-time buyers, it was just 7 percent. Some programs allow down payments as low as 3 percent.

Is a federal tax credit available to help first-time home buyers?

The federal first-time home buyer credit, offered after the housing crisis, expired in 2010. Legislation was introduced in Congress in April to offer an expanded credit, under which eligible home buyers could get a federal tax credit of up to 10 percent of their home’s purchase price — to a maximum of $15,000. The bill’s prospects are uncertain. Some states offer their own tax credits or other help for first-time buyers. Check with your state’s housing finance agency.