A 'Perfect Storm': Sharp Rise in Home Prices, Mortgage Rates Driving Working Americans out of the Market

Posted 45 days ago


The dramatic rise in home prices and mortgage rates in the early months of 2022 has had a relatively limited effect on wealthy buyers and sellers, but has had a severe impact on lower-income Americans—and the Democratic Party may pay a steep price for their frustrations in the November midterm elections and beyond, according to real estate analysts and commentators.

Average payments on mortgages went from 3 percent to 5 percent in the first three months of the year, and are now 38 percent higher than a year ago, according to a Politico report citing figures from real estate listing service Zillow.

Partly because of inflation, the average rate on 30-year mortgages this week hit 5.46 percent, the highest figure since August 2009, according to Bankrate statistics.

Rates are up across the board, including 30-year fixed rates, 15-year fixed rates, and 5/1 adjustable-rate mortgage (ARM) rates. As of April 2022, the median home price in America stood at $344,141, a 20.9 percent leap from a year before, Zillow states.

Inflation, driven by the pandemic and other factors including the government’s expansionist monetary and fiscal policies, has contributed to adverse market conditions where lower-income voters whom the Democratic Party claims to represent have it the hardest. The sharply rising mortgage rates, compounded by an inventory shortfall, are driving many prospective buyers out of the market, experts say.

Some who work in real estate say that the competition for a limited number of houses has reached levels that they have rarely seen in years, and affects lower-income buyers above all.

“I think it probably does disproportionately affect the lower end. If you’re at the higher end of the market, and rates are in the 4s or 5s, that’s not a crazy number. But if you’re trying to get in, a fluctuation in the interest rates can price you out and make you not able to compete with the cash developers,” said Zachary Schorr, a real estate attorney based in Los Angeles.

“The real estate market has been going up and up, outpacing income. As that disparity keeps growing, it becomes increasingly difficult for the lower end to get into entry-level homes,” he said.

High inflation and global uncertainty fostered by Russia’s Feb. 24 invasion of Ukraine are commonly offered as reasons for high mortgage rates, but they only partly explain why buyers have it so hard. The relatively low number of houses on the market is due partly to the fact that some homeowners who might otherwise be inclined to sell do not want to have to go looking for new homes in the current market, according to Mark Pruner, a sales executive at Compass Real Estate in Greenwich, Connecticut.

“One of the reasons we have low inventory is that many sellers, particularly ones who bought post-recession, have ‘silver handcuffs’ in that they have a very low-interest rate on their mortgage. If they were to list their house, i.e., add it to the inventory and alleviate pressure on buyers, they would be looking at higher prices, higher interest rates, and substantially higher monthly payments” on a new home they set out to acquire, Pruner explained.

Hence the market in which Pruner operates is far more favorable to wealthy buyers. In Greenwich, 50 percent of the home sales he handles are cash deals, and 20 percent take place without a mortgage contingency in the contract, because buyers are not worried about their ability to get financing.

The median price for sales in Pruner’s market is $384,400, and in 2021 the lowest value of a home sold through his agency was $450,000, he said.

In the face of these trends, some buyers are simply abandoning their plans.

“It’s gotten to a point where it is almost impossible for real estate brokers to do their job. There is such a lack of inventory, and so many more buyers than sellers,” said Mark Scheier, managing attorney of Scheier Katin & Epstein, an Acton, Massachusetts-based law firm with a focus on real estate.

“It just becomes a joke for a lot of people. After six or seven tries at buying a house, they just give up. I’ve had two clients in the last week tell me, because of increasing mortgage rates, that they’re out of the buying market and will continue to rent. I think you’re going to see a lot more of that,” Scheier added.

The current state of the market is highly favorable to cash buyers unaffected by changes to the interest on mortgage loans.

“I’ve never seen so many cash buyers in over four decades. They are a tremendous number,” Scheier said.

The lack of inventory is so severe that trying to be a real estate agent in this market exacts a toll, said Cara Ameer, a realtor at Coldwell Banker in Orange County, California.

“Real estate agents are worn out from having to vigorously monitor inventory 24/7 to be ready literally to pounce on a new listing the moment it hits,” she said. In addition, buyers feel enormous pressure to buy sight unseen or to commit to prices way beyond what they can reasonably afford in order to secure a property before cash purchasers snatch it up.

The rise in mortgage rates, and the higher monthly payments on homes, are likely to hit people at the lower end of the socio-economic scale the hardest even as they contemplate purchases in the mid-market range. In Acton and in Cape Cod, where Scheier handles large numbers of transactions, a $500,000 house is a relatively m... (Read more)