Mortgage rates double in one year; ‘starting to affect home buying’

Relationship between median-income household and median-priced home at its worst since at least 2006

A combination of fast increases in both home prices and mortgage rates seems to be cooling down a once red-hot home market.

The average sales price for a home in the Dayton area was $246,000 in August, up 9.62% compared to August 2021, according to Dayton Realtors, while the median sales price for August was $209,950, which is a nearly 10.6% increase over August 2021.

But as of Thursday, the Freddie Mac fixed rate for a 30-year mortgage in the Dayton area stood at 6.875%, the highest rate since 2008 and more than double the 3.375% rate it was last year at the same time, according to Billie Duncan-Hart, president of Dayton Realtors and an associate partner with Coldwell Banker Heritage. Meanwhile, the national average 30-year mortgage rate just hit 7.08%, the highest since December 2000, according to Freddie Mac statistics.

“These rates are starting to affect the home buying,” Duncan-Hart said. “We’re already seeing deals falling apart over inspections and sellers taking their houses off the market if they can’t get what they thought they could get, because things are cooling down, and I look for that to continue at least the rest of the year.”

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Duncan-Hart said while August sales prices were up compared to August 2021, they are down compared to where they were earlier this year.

On Sept. 21, the Federal Reserve upped interest rates three quarters of a point, in an effort to constrain the economy, its fifth increase this year and third consecutive 0.75 percentage-point increase. It also said there is a possibility of increasing it one or two more times this year.

“If that’s the case, it’s really going to start affecting home sales because ... things have definitely started slowing down,” Duncan-Hart said. “Before we went into this hyperactive market a couple of years ago, typically things would slow down in our area the closer it got to the holidays and the winter months, and then it would start slowly picking back up after the first of the year. Well, if the Feds decide to up rates another one to two times, I think that could really slow down the winter market.”

Effect on local buyers

Brooke Grider of Oakwood, a 42-year-old mother of two and a registered nurse, said she has been actively looking for a home in the last two months.

“There’s not as many homes on the market, but from what I’ve seen, more have been sitting longer,” Grider said. “It seems as though it might be shifting more to a buyer’s market, which I’m OK with. I don’t feel a sense of urgency to act on a house like I’ve heard people have been doing over the past year, where there’s multiple offers coming in and they’re going over (asking price by) $10,000 or $20,000 and the house is barely on the market. I’m not encountering any of that.”

Year to date through the end of August, home sales for the Dayton area are down 2.53% from last year, according to Dayton Realtors. Meanwhile, the average sales price is up 11.15% and volume, or inventory, is up 8.33%.

Even though prices are up, there remain a healthy number of sellers and buyers on the market wanting to move, Duncan-Hart said.

If the Federal Reserve does increase mortgage rates another time or two this year, home prices should level out, she said.

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Loretta Mester, president and CEO for the Federal Reserve of Cleveland, said activity in the housing sector has been slowing rapidly in response to higher mortgage rates, but there is a long-run imbalance between demand and supply of housing.

“So despite the moderation in activity, housing prices and rents remain quite high,” Mester said Monday in prepared remarks at a Massachusetts Institute of Technology event. “It typically takes some time for higher rents to flow through to the inflation measures, so growth in housing rent and shelter costs will likely keep inflation elevated for some time.

National data is stark

George Ratiu, manager of economic research at Realtor.com, said the last time mortgage rates were in the 7% territory was two decades ago, in early 2002.

“At the time, the median price of an existing home was $150,900 and that of a new home was $182,700,” he said. “With a 20% down payment and a 7% interest rate, the buyer of a median-priced home in 2002 would have a monthly payment of $803, before property taxes, insurance and HOA fees. With the median household income in 2002 at $42,409, and assuming a 25% marginal tax rate, a household dedicated about 30% of its monthly income to a mortgage.”

Credit: JIM NOELKER

Credit: JIM NOELKER

Today’s typical household, nationally, is looking at homes with a median price of $435,000, which translates into a monthly mortgage payment of $2,300, he said.

“Given that the median annual income is about $71,000 and assuming a federal tax rate of 22%, today’s household is spending 44% of its income on a mortgage, before factoring in property taxes, insurance and other expenses,” Ratiu said.

The huge surge in mortgage rates over the last nine months has squashed many buyers’ budgets, leading to a significant pullback in transactions, Ratiu said.

“The 7-month decline in existing home sales is not surprising considering the increasing affordability crisis,” he said. “A household earning the median annual income of $71,000 and using a 20% down payment could afford a home priced at $448,700 in January 2022 when rates were 3.1%. In contrast, at a 7% mortgage rate, the same household can only buy a $341,700 home — meaning that consumers have lost $107,000 in buying power this year.”

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Rates may rise ... for now

With monetary policy continuing to tighten, mortgage rates are expected to continue climbing, Ratiu said.

“While even two months ago rates above 7% may have seemed unthinkable, at the current pace, we can expect rates to surpass that level in the next three months,” he said.

The Federal Reserve Bank of Atlanta said that as of a few weeks ago, a median-income American household would need to spend 44.5% of their income to afford payments on a median-priced home in the United States, the highest percentage on record with data going back to 2006.

Grider said increasing interest rates are “obviously ... not ideal,” but from a buyer’s perspective, she would personally rather go into a purchase without the pressure and the competition.

“I feel like I might be paying less for a home up front,” she said. “Yes, interest rates are nearly double, if not more, than they were last year, but I hope to eventually refinance when they shift back down again because they’ll come down eventually.”

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