Why Buying a House is Now More Expensive

If you’re considering moving, refinancing your mortgage, or attempting to cash in on the dramatic rise in home prices that’s occurred over the past few years, then you may want to pump the breaks. Prospective home shoppers are finding that the overall cost of buying property is substantially more money than it was before the COVID pandemic.

Why is that? In this post, we’ll explore what’s going on in the housing industry and what this means for you.

Mortgage Interest Rates Are Soaring

For anyone who hasn’t been in the market for a house for a while, it may come as a shock how much mortgage interest rates have gone up.

In January 2022, a borrower with good credit could get a 30-year conventional mortgage with a fixed rate of 2.67%. By December 2022, that rate had jumped all the way up to 6.42%.

To put this into context, let’s say you wanted to borrow $250,000 to buy a home. In this case, the difference in your monthly mortgage payments would have been:

  • January 2022 = $1,010
  • December 2022 = $1,567
  • Difference = $557 for a 55% increase 

What’s worse is that going into 2023, rates have continued to climb. As of this writing, the majority of lenders are advertising rates above 7% – the highest they’ve been in over 15 years! And unfortunately, they’re only expected to go higher and stay that way for the next 1-2 years.

Why Have Mortgage Interest Rates Increased So Much?

The majority of the blame for rising mortgage rates can be placed on inflation. As most consumers are already facing, everything you buy on a day-to-day basis from groceries to gas for your car has gone up in price over the past two years. The CPI or consumer price index, the indicator used to measure inflation, peaked at 9.1% during June 2022 reaching a 40-year high.

To correct this, the U.S. Federal Reserve is tasked with stabilizing the economy – particularly in matters concerning inflation and unemployment. Their primary recourse is to raise the federal borrowing rate – the figure used to determine how much it costs for banks to borrow money.

The consequence of changes to the federal borrowing rate is that it changes the rates of all other financial products throughout the industry: 

  • Business/consumer loans
  • Credit cards
  • Interest paid on savings accounts
  • … and of course mortgages! 

Simply put, every time the Federal funds rate increases, consumers can expect mortgage rates to follow. This isn’t necessarily a one-for-one change, but the overall trends are the same.

Home Prices Have Also Increased

Sadly, the cost of borrowing money isn’t where the story ends. What’s making the situation even more complicated is the fact that home prices have also increased and do not appear to be going back down.

During the COVID pandemic when most Americans were receiving stimulus checks, many choose to move. This caused there to be more demand than supply, and home prices started going rise.

To put this into context, the median sale price for homes sold in the U.S. was $329,000 at the beginning of 2020 (just before the start of the COVID pandemic). As of the end of 2022, the sales price had climbed up to $467,700. That’s a 42% increase!

If you know anyone who’s tried to move over the past two years, then they’ve probably got some stories to share. Lots of home shoppers were frustrated when their offer was beaten by another that was above the asking price or all-cash.

When Will Prices Go Back Down?

Unfortunately, no one knows. While most experts naturally assumed that as inflation and mortgage rates increased, home sales would naturally fall. This in turn would bring down home prices. However, we have yet to see this actually occur.

The reason home prices are staying stable is that there is still more demand than supply. For those people who do want to buy a house, there aren’t a lot of options for them to choose from. For that reason, until these two forces exchange places, we can expect home prices to stay relatively the same as what they are now.

Control What You Can Control

No one has control over the economy. When it comes to topics about inflation, interest rates, and prices, the chips will fall where they may. All you can control is how you respond to these situations.

For starters, if you don’t have to move, then you may want to wait for a few more years. Although the Fed is warning interest rates may be high for longer than the experts originally anticipated, the good news is that they won’t stay that way forever. Generally speaking, high-interest rates are bad for the economy. They make it harder for businesses to borrow money and conduct their operations. Higher rates also slow down purchases from consumers on all fronts: auto loans, credit card usage, etc.

If you do have to move, then be selective about your choices. Don’t buy a home that you can’t afford just because that’s what the market is asking. Broaden your horizons and consider other alternatives such as buying a smaller home, smaller lot size, or living further away from where they’d like to be.

As always, the more you’re able to save, the less you’ll have to borrow and the lower your mortgage payment will be. Therefore, it would be a good idea to start saving as much of your discretionary income as possible. You can figure out how much is available by tracking your expenses automatically using a budgeting app like Buxfer. By setting aside a little bit every week or month, you’ll be surprised how quickly it builds up. Plus, you can use rising interest rates to your advantage and earn a decent return while your savings build.

Featured image credit: Unsplash

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