Following the trend of the 10-year Treasury yield, mortgage rates resumed their upward trek. The 30-year fixed mortgage rate surged to 3.69% from 3.55% the previous week. Rapidly rising inflation and surprisingly strong job gains in January pushed up rates. While employment and inflation are the key determinants of the Fed’s next steps, the Fed will likely raise short-term interest rates as soon as next month in order to control elevated inflation.
How will higher mortgage rates affect homebuyers? Rising rates drop housing affordability as the interest rate on a mortgage has a direct impact on the size of a mortgage payment. Higher rates increase mortgage payments, while also typically reducing the amount of money that people can borrow. Nearly 4 million households will likely be affected by rising rates in 2022. Meanwhile, affordability has already dropped due to record-high home prices and record low inventory in the last couple of years. NAR and Realtor.com partnered to examine the impact of the dual phenomenon of record-high homes prices and record-low inventory on homebuyers. According to the report, middle-class homebuyers are more impacted than any other income group. With even fewer entry-level homes on the market, there are currently more than 280,000 fewer homes available for sale that these buyers can afford to buy compared to pre-pandemic. Comparing with the number of households that earn that income, there is one affordable listing for every 125 households. This is a sharp increase from one listing for every 46 households at the end of 2019. Thus, homeownership attainment will become especially challenging for these buyers unless more entry-level housing supply is provided.