In the current housing market, a widening gap is evident between those who possess assets and those who do not. The average homebuyer encounters increasing affordability difficulties as property prices escalate and available listings stay constrained. Adding to the pressure, the recent surge in mortgage rates complicates the decision to purchase a home for many, exacerbating affordability challenges. The average 30-year fixed mortgage rate stood at 7.4% this week, as reported. That represents a notable increase compared to the same period last year, when the average 30-year fixed mortgage rate stood at 6.27%. As the US midterm elections approach, increasing mortgage rates are exerting additional pressure on an already beleaguered housing market, coinciding with heightened affordability concerns among voters. Higher-income buyers, supported by increased liquidity and expanded financial capacity, are capturing an increasing portion of the housing market, whereas lower-income buyers face challenges in maintaining their presence. It is a division that illustrates the overarching “K-shaped” economy: as living expenses increase, affluent Americans are more equipped to withstand the impact, whereas individuals with constrained financial resources have diminished flexibility. The same division is manifesting in the housing market: Americans who exhibit lower sensitivity to elevated interest rates are progressively gaining an advantage. “It’s very expensive to get into a house if you’re looking for one right now,” said Oscar Munoz. “The only people that we find are driving transactions in the housing market are high-income consumers.” And “They have the wealth to transact in this market, which is unaffordable for most Americans,” Munoz added.
Data indicates an increasing divergence in homebuying intentions this year. After tracking broadly with other income groups for several years, Americans earning $100,000 or more are now increasingly inclined to express a desire to purchase a home, in contrast to lower-income consumers. The recent rise in mortgage rates above 7% may widen the gap, Munoz said, as higher monthly payments make it harder for lower-income Americans to qualify for a mortgage or afford the payments if they do. Higher-end buyers are likely benefiting from a robust stock market, which reached record highs as recently as last week, thereby enhancing their purchasing power. “There are different markets by geography, different markets by price point. What we’re seeing is the low end is dragging down the overall market,” Compass CEO Robert Reffkin said. In Los Angeles, Brock and Lori Harris, a husband-and-wife real estate team, noted that buyers facing the potential for increased mortgage payments are starting to retreat from the market. “I always find it funny that cars are marketed as a monthly payment, but homes are not. Homes just show the price and then you have to pull out your mortgage calculator to figure out what your payment is,” said Brock Harris. “And suddenly, that payment is much, much higher than it used to be.”
National data indicates a retreat among home shoppers reliant on borrowing to finance their home purchases. Mortgage applications last week experienced a decline of 16% compared to the same week one year prior, as reported by the Mortgage Bankers Association on Wednesday. Brock and Lori Harris observed an increase in cash buyers within the Los Angeles market; however, these buyers are exhibiting a more cautious approach to their spending compared to previous years. “They’re aware, but they’re less sensitive to interest rates,” Lori Harris said of cash buyers. “Whereas a buyer who is taking out a loan might be priced out of a house they qualified to buy just two or three months ago because of these high rates.” In September, cash sales represented 27% of transactions nationwide, as reported by the National Association of Realtors in their most recent data release on Tuesday. That is down from 30% a year ago; however, mortgage rates didn’t breach 7% until the final week of September, crossing a threshold that some experts suggest could lead buyers who depend on mortgage loans to pause their purchasing decisions. Mortgage rates typically follow the movements of bond yields, which have experienced significant fluctuations in recent months as investors brace for additional rate hikes from the Federal Reserve aimed at controlling inflation. Those expectations have led to an increase in bond yields, thereby exerting upward pressure on mortgage rates.
In the weeks following the rise of mortgage rates above 7% late last month, eXp Realty, a prominent player in the real estate broking sector, experienced an elevated rate of deal cancellations, according to Leo Pareja. “What that tells us is that it is shocking psychologically. It’s a real barrier,” Pareja told, though he added that the deal cancellation rate has since returned to normal levels for this time of year. For home shoppers still seeking affordability in this elevated interest rate landscape, Pareja recommended considering new construction. New homes have historically held a price advantage over existing homes; however, this dynamic has reversed in the last two years. In September, existing home prices experienced a year-over-year increase of 1.3%, reaching $417,500. This marks the 39th consecutive month of annual gains, as reported. Meanwhile, the median price of a new home stood at $393,700 in August, as reported by the latest Census Bureau data. “Unlike a homeowner who tests the market and doesn’t get their price, they can just pull it off the market if they have a lower interest rate… but a builder is in the business of selling,” Pareja said. Consequently, builders are increasingly relying on incentives to draw in new buyers, such as mortgage rate buydowns that can assist in reducing monthly payments, Pareja noted.
