As mortgage interest rates rise, first-time homebuyers get squeezed
There had been one silver lining during the first year of the COVID-19 pandemic for those individuals, couples, or families who were looking to buy a home.
But it looks like that silver is tarnishing into a darker grey.
Despite high prices and record-low inventory of homes available, buyers were able to take advantage of mortgage interest rates that had dropped to historical lows and still be able to get into their desired home.
But, in early March, mortgage rates rose above 3% for the first time since July 2020 and experts believe that it won’t drop below that threshold again for quite some time, if ever.
With interest rates now on the rise, first-time homebuyers are likely to be the buyers most adversely affected.
They already struggle to come up with the money for a down payment, as 52% of first-time homebuyers are already borrowing money from family and friends to pay for their down payment.
Now, if the mortgage cost also goes up, it could price them out of buying a home.
According to a survey conducted by realtor.com, nearly 20 percent of first-time homebuyers spent more than a year shopping for a home in 2020.
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The pandemic and the subsequent plummeting mortgage rates brought more buyers into the market, which increased demand, bolstered prices, and decreased supply.
The supply went into freefall. According to the survey, the number of homes available dropped by 49% from February 2020 through February 2021, which is especially problematic as there was a housing shortage in the country prior to the start of the pandemic.
This outcome has been a perfect storm.
- More buyers coming to market because of low interest rates.
- People leaving cities in droves and looking for larger homes in the more spaced-out suburbs because of the pandemic.
- Sellers afraid of contracting COVID-19 held off on listing their home because they didn’t want strangers coming into their homes as part of open houses.
- Builders have had to slow production of new construction because of the coronavirus.
This has resulted in an increase in the median home price of 14 percent this February compared to last.
The median price nationally was roughly $353,000.
And these prices weren’t just in certain markets. A recent report by the National Association of REALTORS® (NAR) indicated that every market that NAR monitored saw an increase in home prices.
The increasing mortgage interest rate could finally have the prices reach a ceiling, because higher interest rates make monthly payments more expensive, but it still makes it harder on people buying their first home.
However, while the long-term outlook is scarier for first-time homebuyers, in the short-term, they might be able to still have a chance to compete for a home because although interest rates are going up, anything between 3% and 3.4% is still very low when compared with historical data.
But the path to home ownership for these first-timers is definitely getting more difficult to traverse.
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