Noelle Knox
USA Today
Rising interest rates on top of higher gas prices and property taxes are making it even harder to afford a home and putting the brakes on the nation’s hottest housing markets.
In the latest evidence, the National Association of Realtors said Tuesday that sales of existing homes fell 6% from January to May. The median priced home in May cost $230,000, up 6% from last year.
“The one thing that’s changing my forecast is the Federal Reserve,” said David Lereah., chief economist for the NAR, who said he now expects home sales to decline as much as 8% this year.
“The market is expecting several more interest rate hikes from the Fed, and that could harm some of our nation’s cooling housing markets. There are a handful of markets that are vulnerable to interest rate hikes,” he said.
The Fed meets Wednesday and Thursday and is expected to raise interest rates for the 17th time in two years.
Previous increases are already making it tough for home buyers. Last week, the average interest rate on a 30-year, fixed-rate loan was 6.7%, up from 5.57% a year ago. That means someone who borrowed the full $230,000 purchase price of the median home would have monthly payments of $1,486, instead of $1,316 a year ago.
Rising interest rates are even more dangerous for homeowners with adjustable-rate mortgages. In San Diego, where the median home price is $607,000, for example, 74% of home buyers last year took out a loan that allowed them to pay only the interest or even less, according to Loan Performance.
On Tuesday, PMI Mortgage Insurance released it’s latest Market Risk Index, which showed that 13 major metropolitan areas have a 50% chance or greater of seeing declining prices in the next two years.
“We’re seeing an orderly slowdown in the market,” says Mark Milner., chief risk officer for PMI Mortgage Insurance. “Affordability continues to be a challenge for buyers, but those risk elements are offset by the fact that the economy remains strong and labor markets solid.”
One out of three Americans are worried that rising monthly payments — especially property taxes and energy costs — will force them to sell their home and buy a less expensive one, according to a survey released Tuesday by the NAR. By a 2-to-1 margin, Americans say that high monthly payments rather than high down payments are the No. 1 obstacle to buying a home. And half of renters surveyed said they worry the cost of housing is so unaffordable that they will never be able to buy a home.
In May, the median price of a single-family home rose to $229,700, up 6.4% from a year ago. The median condo went for $229,300, up 1.9%.
While home sales are still high by historically standards, sales of existing homes in May fell 1.2% from April. The seasonally adjusted sales pace of 6.67 million units was down 6.6% from May of last year.
In addition to renters who can’t afford to buy, rising prices are also scaring away investors. The number of condos listed for sale in Las Vegas, for example, is up 67% from last year.
The lack of investors, “That’s the whole story of the (Las Vegas) market,” says Dennis Smith, president of Home Builders Research, a real estate data firm. “It’s the same way in California and Phoenix. And it’s not going to change much until you shake out the investors, which is going to take a year to a year and a half until we start to see a truer reflection of where we are.”
Of course not all markets across the country are seeing the same cooling trend in home sales. Texas, North Carolina, and New Mexico, for example, are seeing double-digit gains in home sales.
And the market for newly built homes looks strong because builders are enticing buyers with free TVs, kitchen upgrades and other types of incentives. new-home sales in May rose for the third month in a row, the Commerce Department said Monday.
But the results were in sharp contrast to the level of confidence of home builders, as measured by the Housing Market Index. The index for June, released last week, dropped to the lowest since April 1995.
And it’s easy to see why. On Monday, Lennar became the fifth home builder in recent weeks to warn investors of lower orders and more cancellations.