Homebuyers lured by dip in mortgage rates still higher than a year ago

Credit: cus

Credit: cus

It wasn’t the price, it was the rate.

Kevin Johnson and his wife closed in December on a newly constructed, five-bedroom, three-bath home in Dallas for $449,000 — $100,000 more than the price they got for their Powder Springs home — a move they weren’t making because they really wanted to leave their home of eight years.

“Had we not found this one, we would have just stayed in our other house,” he said.

Mortgage rates had been climbing all year, shoved higher by the Federal Reserve’s steady hikes in short-term interest rates, a campaign aimed at cooling inflation that had also been chilling the housing market. But as mortgage rates soared, Johnson found a builder who offered an “in-house” mortgage at 3.9%.

“That incentive made the difference,” he said. “If there’s one thing I can do, it’s arithmetic.”

Prices matter, but rates are crucial.

The median list price of a metro Atlanta home has risen 34% in five years, according to Realtor.com, a challenge to affordability. In early February, just 10% of listings were at $250,000 or below, according to broker Kristen Jones of Re/Max Around Atlanta.

Prices have been rising faster than incomes, and not just in Atlanta.

“I think our biggest concern is continuing to find affordability for the majority of Americans,” said Ryan Marshall, chief executive of Atlanta-based PulteGroup, the nation’s third-largest homebuilder. “Most people who buy a house take a mortgage and the impact that the Fed has on affordability is front and center,” he told the Atlanta Journal-Constitution.

The median sales price of a metro Atlanta home in January was $360,000, according to the Georgia Multiple Listing Service.

The fiercest demand is for lower-priced homes, but the higher prices go, the more interest rates are a factor, said Richard Key, a broker with Village Premier Collection. “We saw a lot of people step back and wait for the rates to come down. And then we saw an influx of buyers into the market in the new year.”

When rates dip, they can bring higher-priced homes within reach of cash-strapped buyers. Higher rates can put the same homes out of reach.

Even if it doesn’t chase a wannabe buyer out of the market, it changes calculations, said John Ryan, chief marketing officer for Georgia MLS. “For the average home buyer, the rise in rates could mean the difference between an extra bedroom, or a compromise on the location or desired features of a property.”

In mid-2021, the average 30-year mortgage rate was 2.77%. Back then, a borrower with a 20% down payment could buy a $400,000 home, borrow $320,000 and have a monthly payment of $1,638, according to Bankrate. As the Fed started hiking, rates rose in early 2022 to 3.55%.

That increased the monthly tab by $136. Painful, but the rate had just begun to bite.

The Fed kept shoving and rates kept climbing and by mid-November, they averaged 7.37%, according to Mortgage News Daily, which meant that same buyer would face a monthly payment of $2,538, up more than $1,000-a-month from the rock-bottom rates of 2021.

No wonder many buyers left the market.

Sales in the dozen counties centered around Atlanta were down 38% in November from the same month a year before, according to Georgia MLS.

While the Fed sets the ground floor for borrowing, it doesn’t dictate mortgage rates. Other factors — the broader economy, inflation, the market for other investments, the buyer’s credit worthiness — also figure in. And in the last few weeks of the year, mortgage rates fell so that same borrower would pay $2,274 — up $636 from two years ago, but a bargain compared to November.

Thomas Hulme and his wife have been staying with her family since moving back to Atlanta last year. They’ve been house-hunting for something between $450,000 and $650,000, he said. “And that’s really stretching. But you can only live with your in-laws for so long.”

He’s a broker for Re/Max, so he knows the market, and he marvels at the way rates move buyers.

“When the rates are a half-point or a full point higher, it just makes it so much harder for people. It really changes the game.”

As rates dipped, they found themselves in competition for desirable homes, he said. “We’ve made three offers on three houses and come up short.”

Competition could get even more heated. This week, the average dipped to 5.99%, according to Mortgage News Daily.

To be sure, even the fall’s higher rates were not historically high: From 1971 until the summer of 2001, the average mortgage rates dipped below 7% only for a few weeks.

But last fall’s rates were just as surely a big change from the immediate past. The last time mortgage rates averaged more than 7% was the late winter of 2002. An entire generation of homebuyers has borrowed money cheaper than a buyer entering the market in November.

That means almost no one has an incentive to refinance their mortgage. It also means most owners who sell will face an increase in their rates if they buy another home.

That keeps many potential sellers from ever putting their homes on the market, said Warren Wachsberger, chief executive of AECOM Capital, a real estate investor and developer, which recently started construction of a 500-unit apartment complex next to Piedmont Park.

It’s hard to predict how long it will take the Fed to be satisfied that it has reduced inflation, which is partly about prices, but also about the Fed’s attitude, he said.

“The question is, how long will it take to unwind about $5 trillion of stimulus put into the economy?” Wachsberger said. “The one certainty is that we don’t know.”

Average mortgage rates

Recent: 5.9%

Year ago: 3.55%

High: 7.37% (November)

Monthly payment, $300,000 mortgage

2.77% rate, mid-2021: $1,556

3.55% rate, early 2022: $1,684

7.37% rate, November 2022: $2,400

6.13% rate, January 2023: $2,152

5.99% rate, Feb. 1, 2023: $2,125

Metro Atlanta housing market

Median sales price, January 2022: $360,000

Median sales price, January 2021: $352,000

Median sales peak: $412,000 (June 2022)

Sources: Georgia Multiple Listing Service, Re/Max Around Atlanta, Bankrate.com, Mortgage News Daily, St. Louis Federal Reserve Bank