More home buyers are backing out of real estate purchases at the last minute as rising mortgage rates make borrowing more costly, Bloomberg reports.
One Seattle-area couple told Bloomberg that they were in the process of buying a $400,000 home when they learned that their mortgage payment would be about $300 more a month than it would’ve been in February. That prompted them to put their home search on hold.
Mortgage rates have been increasing since May, and two weeks ago, they surged to a two-year high. Some housing experts say that’s cooling demand from home buyers as it chips away at affordability. The 30-year fixed-rate mortgage has risen from a record low average of 3.31 percent in November to 4.51 percent today, according to Freddie Mac.
“A lot of agents are reporting that buyers were in escrow on a home, and then rates went up and they no longer were able to afford the home,” says Ellen Haberle, a real estate economist for Seattle-based brokerage Redfin.
Contracts to buy existing homes dropped 1.3 percent in July — the largest monthly decline this year, according to the National Association of REALTORS®.
“There is a bigger monthly payment shock in the high-cost areas,” said Lawrence Yun, NAR’s chief economist. “Higher interest rates may pull demand out.”
High-priced markets where affordability was already getting out of reach may be most at risk of rising mortgage rates. San Francisco, Los Angeles, New York, and Boston could be hit the hardest, according to a report by Barclays analysts.
In response to rising rates, some borrowers are turning to adjustable-rate mortgages. With those, interest rates are still low, but payments will rise after five years, says Brian Koss, executive vice president of Mortgage Network Inc. Borrowers are also locking in rates before they edge higher.
“It’s just an adjustment,” Ara Hovnanian, CEO of New Jersey home builder Hovnanian Enterprises Inc., told Bloomberg. “We got very spoiled by 3.5 percent mortgage rates.” Hovnanian says that household formation will continue to drive housing demand, however, despite rising rates.
Source:“New York to Seattle Home Buyers Tap the Brakes,” Bloomberg Businessweek (Aug. 30, 2013)