The median monthly mortgage payment was almost one-and-a-half times as much as the median monthly asking rent in the second quarter, the largest differential in records going back to 2009, according to data tracked by the Mortgage Bankers Association, an industry trade group.
Home prices and rents have risen briskly over the past year-and-a-half. But the rising relative cost of buying is largely the result of additional interest buyers are paying when they lock in mortgages at the highest rates in years.
The average 30-year fixed mortgage rate rose to 5.66% this week, nearly double what it was a year earlier, according to a Freddie Mac survey. The shift is a shock for many buyers because low interest rates in the past few years had ushered in a period of greater affordability and brought many first-time buyers into the market.
In the fourth quarter of 2020, median mortgage payments and asking rents were basically equal at just under $1,200. Since then, rents have risen 10% to $1,314 in June, according to Census Bureau data, while mortgage payments have risen 58% to $1,893, according to MBA mortgage application data. The ratio between the two stood at 1.44.
“The ratio is a great indicator for households deciding ‘should we rent or should we go ahead and buy?’” said Edward Seiler, a housing economist at the MBA.
By some measures, housing is the least affordable in decades because the rise in rates has collided with a jump in home prices. With inflation hitting all facets of daily life, the higher costs of buying are encouraging some prospective buyers to bite the bullet and keep renting, even if their landlords are asking for more money.
Melissa Siani and her family went under contract earlier this year to buy a newly built home in Forney, Texas, but the completion date was delayed several months past when they needed to relocate from Alabama. They backed out of the purchase and opted to rent instead. While their rent is more than they expected to pay, it is still less than their mortgage payments would have been, Mrs. Siani said.
“The combination of the prices of houses plus the interest rates—it’s making it harder to afford,” she said of buying a home. Her family expects to stay in Texas for about three years. “I’m hoping the market calms down a little bit for our next move,” she said.
The decline in affordability is pressuring the housing market. Some 16% of buyers in contract to purchase a home in July backed out, according to a
analysis. Home price growth slowed in June and existing-home sales have been falling for months.
“Clients that I’ve worked with might have been able to afford a more expensive home at the lower interest rates,” said Heather Kruayai, a Redfin real-estate agent in Jacksonville, Fla. “Because interest rates have gone up, they’re priced out of the home they wanted.”
Alec and Ashley Xenakis went back to renting, at least temporarily, when they moved to Tucson, Ariz., in August. They sold their home in the Denver area but found that buying a similarly-priced house would cost over a thousand dollars more a month because interest rates had risen so much since they got their sub-3% mortgage last year.
So they signed a nine-month lease for a townhome, where they have the option to keep renting on a monthly basis afterward. They plan to buy a house in the mid-$400,000 range, below the more than $600,000 they sold for. But they aren’t in a huge rush.
“We’re going to be paying more for interest, but I don’t think rates will be this high forever,” Mr. Xenakis said.
The affordability challenges may be easing up slightly. The median mortgage payment fell to $1,844 in July, according to the MBA, and it may continue to fall if home prices and mortgage rates moderate. Moreover, the median mortgage cost for buyers in the 25th percentile, a proxy for first-time buyers who typically purchase cheaper homes, is still below the median asking rent, despite rising along with the rest of the market.
Many Americans are still in a good position to buy, even if they have to reduce their budgets to compensate for higher mortgage costs. Consumers built up savings over the course of the pandemic and received pay bumps because the hot labor market gave workers more power to demand them.
They may reason that the higher costs of buying are justified, in part because mortgage payments are typically locked in for many years to come, while rents increase over time, Mr. Seiler said.
“People have started to come to acceptance with rates,” said Sam Polland, senior loan officer at Intercoastal Mortgage LLC in Potomac, Md. “It’s no longer a struggle or fight with folks.”
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