On September 21, the Federal Reserve raised interest rates by three-quarters of a point to slow the economy, its fifth hike this year and the third straight 0.75 percentage point increase. It also said there was a chance it could be increased once or twice more this year.
“If that’s the case, it’s really going to start hurting home sales because … things have definitely slowed down,” Duncan-Hart said. “Before we jumped into this hyperactive market a few years ago, things would typically slow down in our area as the holiday and winter months approached, and then slowly pick up speed after the start of the year. Well, if the Fed decides to hike rates 1 or 2 more times, I think that could really slow down the winter market.”
Impact on local buyers
Brooke Grider of Oakwood, a 42-year-old mother of two and a registered nurse, said she’s been actively looking for a home for the past two months.
“There aren’t that many houses on the market, but from what I’ve seen, more of them have been standing longer,” Grider said. “It looks like it’s going to shift more to a buyer’s market, which is fine with me. I have no sense of urgency trading on a house like I’ve heard people have done over the past year where multiple offers come in and they go over $10,000 or $20,000 (ask price) and the house is barely on the Market. I encounter none of that.”
Year-to-date through the end of August, home sales in the Dayton area are down 2.53% year over year, according to Dayton Realtors. Meanwhile, the average selling price is up 11.15% and volume, or inventory, is up 8.33%.
Though prices have risen, there’s still a healthy number of sellers and buyers in the market looking to move, Duncan-Hart said.
If the Federal Reserve hikes mortgage rates once or twice this year, house prices should level off, she said.
Loretta Mester, President and CEO of the Federal Reserve of Cleveland, said activity in the housing sector has slowed rapidly in response to higher mortgage rates, but there is a long-term imbalance between housing demand and supply.
“So despite the moderation of activity, home prices and rents remain fairly high,” Mester said Monday in prepared remarks at an event hosted by the Massachusetts Institute of Technology. “It typically takes time for higher rents to feed into inflation measures, so growth in apartment rents and housing costs is likely to keep inflation high for some time to come.
National data is strong
George Ratiu, manager of economic research at Realtor.com, said the last time mortgage rates were in the 7% range was two decades ago, in early 2002.
“Back then, the median price for an existing home was $150,900 and for a new home was $182,700,” he said. “Assuming a 20% down payment and a 7% interest rate, the average home buyer in 2002 would have a monthly payment of $803 before property taxes, insurance and HOA fees. Assuming a median household income of $42,409 in 2002 and an assumed marginal tax rate of 25%, a household invested about 30% of its monthly income in a mortgage.”
Today’s typical household nationally is looking for houses with an average price of $435,000, which equates to a $2,300 monthly mortgage payment, he said.
“Given an average annual income of about $71,000 and assuming a 22% federal tax rate, today’s household spends 44% of its income on a mortgage before property taxes, insurance and other expenses are factored in,” Ratiu said.
The huge rise in mortgage rates over the past nine months has squeezed the budgets of many buyers, leading to a significant drop in transactions, Ratiu said.
“The 7-month decline in existing home sales is not surprising given the mounting affordability crisis,” he said. “A household with an average annual income of $71,000 and a 20% down payment could afford a home costing $448,700 in January 2022, when interest rates were 3.1%. In contrast, with a 7% mortgage rate, the same household can only buy a $341,700 home — meaning consumers lost $107,000 in purchasing power this year.”
Prices may go up…for now
As monetary policy continues to tighten, mortgage rates are expected to rise further, Ratiu said.
“Whereas two months ago interest rates above 7% seemed unthinkable, at the current pace we can expect interest rates to exceed this level in the next three months,” he said.
The Federal Reserve Bank of Atlanta said a few weeks ago a middle-income American household would have to spend 44.5% of its income to pay for a mid-priced home in the United States, the highest percentage on record was dates back to 2006.
Grider said rising rates are “obviously… not ideal,” but from a buyer’s perspective, she personally would prefer to buy without the pressure and competition.
“I feel like maybe I’m paying less for a house up front,” she said. “Yes, interest rates are almost double if not higher than last year, but I’m hoping that when they go back down I’ll eventually be able to refinance because eventually they’ll go down.”