This is the time of year when lots of folks have visions of warming their feet by the fire while the cold wind whistles outside. But with the highest mortgage rates in more than four decades, many people are getting cold feet about a cozy place of their own.
The 30-year mortgage rate broke through 7% in October and that was too much for some potential buyers. According to the Redfin real estate firm, 17% of homes that went under contract with Redfin in September were called off. Nationwide, that comes to almost 60,000 deals that fell through, the highest rate since March 2020 when the World Health Organization declared the COVID pandemic.
High mortgage rates are drying up the pool of potential buyers just like the drought is drying up the Mississippi river. But it’s not just buyers that are changing their minds about housing. Homeowners are taking their houses off the market and deciding to stay put. Why sell a house and buy another one with a high-interest mortgage when you can stay where you are with a mortgage refinanced when rates were at their low, in the 2.5%-3% range?
Mortgage rates in October 2021 averaged 3.09%. Now, they’re at 7%+. Here’s what it looks like when you’re dealing with dollars rather than percentages. If you bought a $250,000 home and made a 20% down payment — $50,000 — you would end up with a starting loan balance of $200,000. On a $200,000 home loan with a fixed rate for 30 years:
- At 3% interest rate = $843 in monthly payments (not including taxes, insurance, or HOA fees)
- At 4% interest rate = $955 in monthly payments (not including taxes, insurance, or HOA fees)
- At 6% interest rate = $1,199 in monthly payments (not including taxes, insurance, or HOA fees)
- At 8% interest rate = $1,468 in monthly payments (not including taxes, insurance, or HOA fees)
Numbers provided by Redfin show home sales dropped by 25% compared to a year ago and new listings have plunged 22%. Additionally, Redfin says less than half the offers made by their agents have competing offers from other buyers.
The locations where the highest percentage of existing home deals fell through in June were in the South and Southwest. In June, more than 27% of the deals in Las Vegas, Nevada collapsed—the highest in all markets—27% in Lakeland, Florida and 26% in Cape Coral, Florida.
New home sales are also taking a hit. Homebuilder cancellation rates have more than doubled since April, according to surveys by John Burns Real Estate Consulting. In July, 17.6% of builder contracts fell through, compared with 8% in April and 7.5% in July 2021.
How high will rates go? Only the Federal Reserve may know for sure. Stay tuned.