Homebuyers Struggle as Mortgage Rates Hit Highest Level Since 2000

More than 90 percent of homebuyers today say they found their home online. Andrey_Popov/Shutterstock

High mortgage rates are keeping homebuyers away from the market, with home sales this year expected to hit the lowest level since 2008.

For the week ended Oct. 20, the 30-year fixed mortgage rate hit 7.9 percent, “the highest since 2000,” said Joel Kan, vice president at Mortgage Bankers Association. Mortgage rates have risen for “seven consecutive weeks,” which has had a massive negative effect on homebuyer demand, he said.

“These higher mortgage rates are keeping prospective homebuyers out of the market and continue to suppress refinance activity,” he said.

“Mortgage activity continued to stall, with applications dipping to the slowest weekly pace since 1995.”

Prospective homebuyers are retreating from the market amid close to two-decade-high mortgage rates and the median U.S. monthly mortgage payment approaching $3,000, according to Redfin. The real estate brokerage firm’s homebuyer demand index, which measures house tour requests and other early signals of buyer demand, fell to its lowest level in close to a year.

The company estimates nationwide existing home sales to only be about 4.1 million units this year, which would be the fewest homes sold since the housing bubble burst in 2008.

“Buyers have been in a bind all year,” Redfin’s economic research lead Chen Zhao said in an Oct. 19 statement. “High mortgage rates and still-high prices are making it harder than ever to afford a home, shutting many young people out of homeownership and causing homeowners to reevaluate whether 2023 is the right time to move.

“The last time home sales were this low was during the Great Recession. At that time, tough economic conditions and slow demand pushed home prices down 30 percent year over year in some parts of the country, creating an opportunity for first-timers to snatch up starter homes—but this time, there’s no deal to be had.”

A homebuyer now needs to earn $114,627 in yearly income to afford a median-priced home in the United States, Redfin says. That’s 15 percent above a year ago and more than 50 percent higher since the start of the COVID-19 pandemic.

Mr. Zhao advises homebuyers, especially first-timers, to “think outside the box” when looking to purchase a home.

“Consider a condo or townhouse, which are less expensive than a single-family home, and/or consider moving to a more affordable part of the country, or a more affordable suburb,” he said.

“Although new listings are ticking up slightly, inventory is still near record lows as homeowners hang onto their low mortgage rates—and that’s propping up prices.”

Seller–Buyer Dynamics

While many homeowners are reluctant to sell their homes, some are listing their properties, given the high prices being offered.

“A lot of Americans are sitting on piles of money in their homes, and some are opting to cash out even if it means giving up their low mortgage rate; they’re worried there’s a possibility home prices will fall if rates remain elevated,” Redfin chief economist Daryl Fairweather said in an Oct. 23 statement.

He expects mortgage rates to remain elevated for the “foreseeable future” and predicts that home prices will stay high next year.

Meanwhile, 16.3 percent of pending sales fell out of contract in September; that’s the highest rate since October 2022.

“Buyers are extra cautious right now. They want to make sure they’re getting a good deal given how much mortgage payments have gone up, and when they don’t feel like they’re getting a good deal, they’re backing out,” said Heather Kruayai, a Redfin premier agent in Jacksonville, Florida.

“Transactions are also falling apart due to skyrocketing insurance premiums and disagreements between buyers and sellers over necessary repairs. Overall, buyers hold a lot of the cards right now, and sellers are having to give out more concessions to close the deal.”

Affordability Concerns

High mortgage rates are a cause of worry for real estate firms as well, since this translates to lower sales and profitability.

Housing affordability is now the No. 1 concern for real estate firms, according to Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors.

“This surpassed the concern of maintaining sufficient inventory, which we saw in 2021,” Ms. Lautz said. “Due to tight inventory, the outlook among real estate firms is more conservative since the pandemic-induced housing boom.

“Only 30 percent of real estate firms believe there will be an increase in profitability from all real estate activities, compared to 58 percent two years ago.”

When the firms were asked about the expected generational effects on the real estate industry over the next two years, the biggest concern was the ability of young adults to buy a home.