Housing market cools as mortgage rates and prices spook buyers

Kyle Tomcak sits outside his home in Aurora, Colorado on Monday, July 18, 2022. Tomcak was looking for a home priced around $450,000 for his in-laws and he and his wife made a offer on every house they visited, whether or not they fell in love with the house.  He said his search became increasingly daunting as he not only lost out to investors offering cash offers $100,000 above the asking price, but when mortgage <a class=rates began to skyrocket. He has since retired from house hunting. (AP Photo/Thomas Peipert)” title=”Kyle Tomcak sits outside his home in Aurora, Colorado on Monday, July 18, 2022. Tomcak was looking for a home priced around $450,000 for his in-laws and he and his wife made a offer on every house they visited, whether or not they fell in love with the house. He said his search became increasingly daunting as he not only lost out to investors offering cash offers $100,000 above the asking price, but when mortgage rates began to skyrocket. He has since retired from house hunting. (AP Photo/Thomas Peipert)” loading=”lazy”/>

Kyle Tomcak sits outside his home in Aurora, Colorado on Monday, July 18, 2022. Tomcak was looking for a home priced around $450,000 for his in-laws and he and his wife made a offer on every house they visited, whether or not they fell in love with the house. He said his search became increasingly daunting as he not only lost out to investors offering cash offers $100,000 above the asking price, but when mortgage rates began to skyrocket. He has since retired from house hunting. (AP Photo/Thomas Peipert)

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Kyle Tomcak was looking for a home for his in-laws in suburban Denver, priced close to $450,000.

Tomcak became discouraged as he lost out to investors offering cash offers $100,000 above the asking price. Then, mortgage rates skyrocketed, putting its price range out of reach.

“All of a sudden your buying power is less…even though your payments are the same,” he said.

Tomcak, 39 and a project manager for a commercial painting company in Aurora, Colorado, had hoped to lock in a monthly mortgage payment of $2,350. His mortgage adviser recommended lowering the maximum price he would pay for a house, first to $300,000 and then to $200,000.

Tomcak has abandoned his search for now..

The Federal Reserve has aggressively raised short-term interest rates to fight inflation, which in turn is helping to push up rates on credit cards, auto loans and mortgages. Rising mortgage rates combined with already high home prices to discourage potential buyers. Mortgage applications fell sharply. Sales of previously occupied homes have fallen for five consecutive months, during what is typically the busiest time of the year in real estate.

The rate on a 30-year mortgage averaged around 5.54% this week, according to mortgage buyer Freddie Mac; a year ago, it was close to 2.78%. Rising rates leave buyers with unwelcome options: pay hundreds of dollars more for a mortgage, buy a smaller home or choose to live in a less desirable area, or drop out of the market, at least until rates go down.

All signals point to the Fed continuing to raise interest rates, promising little relief to potential buyers, at least for the rest of the year.

Data provided to The Associated Press by real estate data firm Redfin shows how much home a buyer could get on a mortgage payment of $2,000 a month. In Providence, Rhode Island, for example, a year ago an average buyer could have bought a home of around 4,900 square feet for a mortgage payment that size. Now that amount only allows the buyer a 2,200 square foot home.

In Seattle, a warmer housing market, a payment of $2,000 a month this time last year would have allowed a buyer to acquire a modest 1,300 square foot home. This type of payment would only get them a 950 square foot apartment.

“Put simply, people can’t afford the same house as a year ago,” said Daryl Fairweather, economist at Redfin.

As well as causing prospective homeowners to reconsider their home search, rising rates are also forcing an increasing number of buyers who have made a deal on a home to back out. About 60,000 home purchase transactions failed in June, representing nearly 15% of all homes that were under contract last month, according to Redfin. That’s up from 12.7% in May and 11.2% a year ago.

For more than a decade, potential buyers were willing to put up with rising home prices because the cost of a mortgage was at historic lows. The average mortgage rate on a 30-year fixed-rate mortgage has generally remained below 4.5% for most of the past decade, according to data from the Federal Reserve Bank of St. Louis.

Financial data firm Black Knight estimates that rising mortgage rates have increased a typical borrower’s monthly payment by 44% year-to-date. Since the start of the pandemic, the average mortgage payment has doubled to more than $2,100.

Most of the pain is felt at the bottom of the market: the first-time home buyer, who often has the least money for a down payment and is trying to make the monthly payment work for their budget. Sales of homes priced below $250,000 fell more than 30% in June.

For those who can afford to buy a home even with higher mortgage rates, the downturn in the housing market has a silver lining: more options. As homes receive fewer offers, they tend to linger longer on the market. The number of homes for sale, which has fallen from extremely low levels since the spring, rose 18.7% from a year earlier, according to Realtor.com.

The market has also changed dramatically for sellers.

Raymond Martin and his wife listed their home in Austin, Texas for $1.1 million in early May. They thought selling the four-bedroom, three-bathroom home would be “a walk in the park.”

The couple had reason to be optimistic. As recently as this spring, it was not unusual for sellers to receive multiple competing offers within hours of listing their home, or for some buyers to agree to pay well above the asking price while still waiving their right to a home inspection – all out to beat competing bidders. It really was a seller’s market.

Instead, the Martins have yet to receive a single offer and have lowered their asking price to $899,000. Raymond Martin, 51, noted that shortly before listing his Austin home, a neighbor sold his similarly sized home for $100,000 above the $1 million asking price.

The couple are living in a new home in Florida while patiently trying to sell the Austin property. “Obviously the market is kind of at a standstill,” he said.

Historically, late spring through early summer is peak home buying season in the United States, but there are several signs that buyers have become discouraged.

The number of Americans applying for mortgages is down significantly from a year ago. Weekly mortgage applications tracked by the Mortgage Bankers Association are down about 50% from a year earlier. The drop in mortgage applications could signal a slowdown in future home buying activity, since potential buyers are not applying for a mortgage unless they have chosen a particular house or condo.

Joe Luca, a real estate agent and former president of the Rhode Island Association of Realtors, said buyers should narrow their search, settle for smaller homes or choose a neighborhood farther from downtown.

“People may be looking to buy a house in a really nice town in the best part of this town. Rates are going up so they can’t afford it, so they have to recalibrate what they’re going to buy,” a- he declared.

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Casey reported from Boston. Veiga reported from Los Angeles. AP Reporter Jesse Bedayn contributed to this report from Denver.

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