Interest rate hikes could leave buyers out in the cold

Millions could see their homeownership plans thwarted if interest rates continue their upward trajectory, according to research from the National Association of Home Builders.

The recent spike in interest rates comes on top of record-breaking price hikes over the past two years and increased competition among buyers. For those looking to purchase, a 25-basis-point rate hike at current median new-home price levels could lead to more than a million fewer eligible borrowers, according to NAHB.

“The monthly mortgage payments will increase as a result of rising mortgage interest rates, and therefore higher household income thresholds would be needed to qualify for a mortgage loan,” wrote Na Zhao, senior economist at NAHB. But if rates head above the 6% mark, the number of buyers locked out declines, due to fewer high-income borrowers in the population.

Using an estimated 2022 new-home median price of $412,505 as a baseline, NAHB found the effect of 30-year interest rates rising from 3.5% to 3.75% would eliminate over 1.1 million buyers. Based on a 3.5% interest rate, a home bought at the median would result in monthly mortgage payments of $1,822, the researchers found, and require a minimum income of $99,204. Currently, 39.2 million households qualify for a purchase of that amount. But once the rate jumped to 3.75%, monthly payments would rise to $1,877 with qualifying income of $101,548, reducing the number of eligible households to 38.1 million.

NAHB estimated the median price based on a forecast of the Case-Shiller Home Price Index from 2021 preliminary data. That number is also not far from the cost of all single-family homes for sale nationwide. In the fourth quarter of last year, the U.S. Census Bureau and U.S. Department of Housing and Urban Development determined median for-sale home values had increased to $408,100, surging by almost 14% on an annual basis. Median prices by region ranged from $370,200 in the South to $549,600 in the Northeast.

For potential buyers, the recent spike in rates represents yet another obstacle in homeownership goals. NAHB had already warned last month of turbulence ahead for buyers and sellers in 2022, especially of new homes. “Building material costs are up 21% compared to a year ago,” said Robert Dietz, NAHB’s chief economist, in a press release.

“Higher mortgage rates combined with rising construction costs and a lack of construction workers will increase affordability headwinds in the year ahead.”

According to Freddie Mac’s weekly mortgage market survey, the average 30-year interest rate in mid-February had climbed by over 80 basis points in under two months, but have since retreated with the onset of the Russia-Ukraine war. Last week’s 30-year rate came out to 3.76%, still well above the 2.9% range it hovered at throughout most of last summer.

Two weeks ago, the Mortgage Bankers Association predicted interest rates would likely increase to 4.3% by the end of this year and 4.5% in 2023, with purchase volumes also expected to be up from last year among its members. According to NAHB estimates, a quarter-percent interest-rate jump from 4.25% to 4.5% would require an income level of at least $108,782 and lead to approximately 1.2 fewer eligible borrowers.