- Home buyers are being forced to borrow more conservatively due to higher mortgage rates.
- The average home loan size this month is lower than it was just a few months prior.
- Those looking to buy higher priced homes may have the advantage over those on a budget.
Buyers can only afford to spend so much.
Home prices are way up across the U.S., and have been for well over a year. But last year, home buyers may have had more purchasing power than they do now thanks to how affordable mortgage rates were at the time.
This year, those super-low rates are off the table. At several points in 2022, the average 30-year-mortgage rate topped the 6% mark. And while rates dropped modestly earlier on in July, to call the current rates competitive would be an overstatement.
Because it's gotten so expensive to take out a mortgage, home buyers are increasingly borrowing less. And that could gradually lead to lower home prices on the higher end of the market. But it could create a problem for buyers with limited resources.
Buyers are borrowing less
In March, the average mortgage size reached a record $460,000, according to Mortgage Bankers Association economist Joel Kan. But now, that average mortgage size is down to $415,000. And it's not that homes are getting less expensive -- it's that buyers aren't purchasing the most expensive ones out there.
That's a mixed bag as far as the housing market goes. On a positive note, if buyers start backing away from homes on the higher end of the market, it could drive down prices for higher-end properties. On a less positive note, if more expensive homes become out of reach for an increasing number of buyers, it could result in more competition on the lower end of the market. That could, in turn, make it very difficult for first-time buyers and those on a budget.
Where are mortgage rates headed?
Mortgage rates dipped briefly in July before rising again, and there's reason to believe they're not done climbing. In an effort to slow the pace of inflation, the Federal Reserve is moving forward with interest rate hikes. The logic is that if it becomes more expensive to borrow money across the board, consumers will start to spend less.
But as the Fed raises interest rates, we can expect the cost of taking out a mortgage to follow suit. So it won't be particularly shocking to see the average 30-year mortgage rate creep up toward the 7% range by the end of the year.
Now to be clear, that's not guaranteed to happen. Rates have already risen substantially from the start of 2022, so any increases we see between now and the close of the year may be gradual and minimal. But we shouldn't expect mortgage rates to drop and stay down this year. And the days of being able to take out a 30-year mortgage at 3% may be long behind us.
All told, home buyers may find that they have limited purchasing power until housing prices come down. An uptick in real estate inventory could lead to a drop in home prices, but we shouldn't expect drastic changes along those lines anytime soon.
Those looking to purchase higher-end homes within the next six months may get a reprieve by virtue of there being less competition and demand. But that reprieve could easily be offset by the higher cost of borrowing that buyers will likely be looking at for many months to come.
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