Middle-class homebuyers embrace $7,000 mortgages, strategically planning for future refinancing opportunities

**Rising Mortgage Rates and the Impact on Homebuyers**

In December 2021, the average 30-year fixed mortgage rate was 3.1%. At that time, a borrower could obtain a $700,000 mortgage with monthly principal and interest payments of just $2,989. However, fast-forward to the present day, and a $700,000 mortgage at the current average mortgage rate of 6.90% would require a monthly payment of $4,610, which is $583,000 more over 30 years than the mortgage issued at the lower rate. When factoring in insurance and taxes, the monthly payment could easily exceed $6,000. Additionally, U.S. home prices have risen significantly, with a 12% increase in June 2022 compared to December 2021 and a 39% increase compared to June 2020. This increase in mortgage payments and home prices has impacted the housing market and how buyers perceive affordability.

**Buyers in the Market and the Acceptance of Higher Mortgage Costs**

Mortgage planners, such as John Downs from Vellum Mortgage, have the challenging task of informing potential homebuyers about the new reality of increased mortgage rates and payments. However, unlike in the past, buyers in 2023 are less surprised and have started to accept these higher costs. Downs recently spoke with a middle-class couple in the Washington D.C. area who expected a mortgage payment of around $7,000. He noted that hearing such high payment goals is still new to him. Many buyers believe that these high payments will be short-lived and plan to refinance to a lower payment once mortgage rates decrease. Despite the initial shock, buyers seem to be more comfortable with the idea of higher mortgage payments.

**Buyers’ Reaction to Increased Borrowing Costs**

Buyers in the market are reacting differently compared to last year. Reports indicate that home prices are stabilizing, which may give the impression that buyers have become comfortable with the higher rates and mortgage payments. However, the reality is quite different. Many potential buyers have been priced out of the market due to affordability challenges and loan qualifications. Move-up buyers are also facing the same predicament. In the Baltimore-DC Metro Region, there is a significant shortage of available homes for sale, with a 73% decrease compared to pre-pandemic levels, 57% fewer weekly contracts, and an 8% increase in relisted properties. As a result, prices have remained relatively stable due to the imbalance between buyers and sellers. Buyers are taking the increased payments in stride for various reasons, such as significant income increases and the income tax savings through the mortgage interest deduction. Many believe that they can always refinance in the future when rates come down.

**The Impact on Monthly Payments and Buyer Reactions**

In the past, most clients had a mortgage payment limit of $3,000 for condos and $4,500 for single-family homes. Today, those numbers have risen to $4,000 and $6,500, respectively. Active buyers seem to expect these higher payments and have become comfortable with the new normal. Despite the dramatic increase in payments, buyers’ residual income (post-tax income minus debt) is still in a healthy range due to local wages. However, it’s important to note that the pool of buyers in the market today is much smaller compared to previous years. Many prospective buyers run payments using online calculators and choose not to have conversations with mortgage planners in the first place.

**Market Conditions in the Second Half of 2022 and First Half of 2023**

There were significant differences between the second half of 2022 and the first half of 2023. In the second half of 2022, there was fear and uncertainty in the market. Inventory started to rise, days-on-market increased, and price decreases were widespread. Buyers adopted a wait-and-see approach, hoping for prices to fall and rates to decrease before making a purchase. However, in the first half of 2023, the market began to stabilize. The stock market rebounded, mortgage rates rebalanced, sellers adjusted their prices, and employers started providing significant wage increases. As a result, housing stabilized, and some areas experienced aggressive contracts, price escalations, and multiple offers. However, the strength in housing varied depending on location and price point. The mid-range segment faced challenges, and buyers became more sensitive to the condition of the properties due to the elevated housing payments.

**The “Lock-In Effect” and Its Impact on Market Churn**

The “lock-in effect” is a real phenomenon that impacts the housing market. Many homeowners want to move but are unable to do so due to the high costs. Some cannot afford to buy their current home at the current value and rate structure, while others are not willing to pay the significant increase in mortgage payment based on the desired home size or location. This struggle is especially evident among move-up buyers who may be stuck due to the substantial increase in payment when moving to a higher-priced home. The jump in payment is often too much to handle for those with median incomes. The “lock-in effect” has constrained market churn and limited the number of potential sellers.

**Predictions for the Second Half of 2023 and the Spring of 2024**

Despite the high rates, the desire to buy a home remains strong for many buyers. As the Federal Reserve tightens its policies and inflation improves, it is expected that mortgage rates will start to decrease. This will improve affordability and increase confidence, leading to more buyers and sellers entering the market. This shift is likely to support home values and provide buyers with more options as inventory increases. It’s important to note that the housing market may experience fluctuations, similar to playing with a yo-yo while going down an escalator. However, the general trend is expected to be lower rates and improved affordability. Looking ahead to the spring of 2024, the market may continue to stabilize, presenting opportunities for both buyers and sellers.

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