Homebuyers face another obstacle as costlier loans sap affordability

First-time homebuyers, already getting clobbered by bidding wars, now face a potential knockout punch: higher mortgage rates.

Costs for 30-year loans hit a more than two-year high of 3.69% last week, rising about 20% just since Christmas. Further increases are expected as the Federal Reserve, trying to curb inflation, hikes its benchmark rate. That’s a daunting prospect for entry-level buyers when affordability is already at its worst since 2018.

The pandemic housing rally is heating up again as the key spring selling season approaches, threatening to push new buyers beyond the brink of what they can pay. Their modest incomes put them at a disadvantage when competing against downsizing seniors and single-family landlords for the same moderately priced houses. The jump in borrowing costs is sapping their purchasing power, preventing them from bidding high enough to have a chance.

“Housing affordability is set to get crushed,” said Mark Zandi, chief economist for Moody’s Analytics, who expects 30-year rates to climb above 4% this year.

“Many potential first-time homebuyers will get locked out of homeownership, at least until house prices come back to earth or mortgage rates turn back down,” he said. “Neither seems likely, at least not soon, and certainly not in time for the critical spring homebuying season.”

Cassie Homan, a single Philadelphia renter in her 40s, scours listings websites every day, searching for a modest place in the New Jersey suburbs to be closer to family. She’s on a month-to-month lease to stay flexible. But in her budget of under $200,000, homes go fast unless there’s something seriously wrong.

She recently inquired about a remodeled two-bedroom house built in 1855 with an asking price of $140,000. But it was gone before she could see it, attracting three cash offers within two days. She considered another house only to discover that the seller was passing off the attic as a bedroom. A third property — listed without any photos — was off-limits to tours because a tenant was living there.

Homan said she hopes rising rates cause a downturn in prices, opening up more inventory. Short of that, “I’m screwed — I have no chance in hell,” she said. “I’ll have to rent for the rest of my life.”

Rising rates, at least in the short term, help to shrink inventory even more. Homeowners are increasingly unwilling to move because they’d have to give up their old, lower-cost mortgage and take on a more expensive one to buy a new place. That leaves fewer entry-level properties on the market.

And single-family rental firms scooping up houses by the thousands will keep buying because they’re not dependent on mortgages, according to Scott Buchta, head of fixed income strategy at Brean Capital in Franklin, Tennessee. That will continue to crimp supplies, especially in markets where the companies are most active, such as Atlanta, Phoenix and Nashville.

Sherry Bailey, an agent in Atlanta, said her buyers are constantly losing out to big landlords paying cash.

Bailey is working with a young woman with a government job and a budget of under $200,000 who has been forced to look in North Georgia mountain towns, an hour and a half outside Atlanta. Still, in the time it takes the client to discuss possibilities with her mom, competitors swoop down, Bailey said.

“The spring market hasn’t even started,” she said, “and buyers are already discouraged.”