Mortgage rates have now risen to 5%. Here's how much more expensive homeownership becomes as a result of this

This week, 30-year fixed-rate mortgage rates surpassed 5%. These are raising the cost of homeownership and making it unaffordable for more people. Image Credit

Here's a not-so-fun fact: the average monthly mortgage payment in the United States has increased by a startling 55 % since the beginning of last year. That's because, on top of price increases in the hot property market, mortgage rates have risen dramatically in recent weeks.

Nick Cacciatore, who is trying to buy a home in Tampa, Florida, says, "It's pretty insane." "It's quite depressing."

Mortgage rates were under 3% when Cacciatore started exploring last summer. They've risen to more than 5% this week. While this may not appear to be a significant amount, it can make a significant impact when purchasing a home. And Cacciatore was looking for houses in the range of $600,000.

"It increased my monthly expenses by almost $700 a month," he says. "I mean, just from interest rates, it's a ridiculous amount." That doesn't even take into account the significant increase in costs over the past year while he's been looking for a home.

Cacciatore is a lawyer who is establishing a family law firm. His fiancée works in the veterinary field. They have decent employment and some funds, so they're in good shape.

However, in this overheated home market, they were consistently outbid. They're looking at smaller, less expensive condos now that mortgage rates are higher.

Some first-time buyers are entirely giving up.

"It's very much taken them off the market," says Gabriela Raimander, a St. Petersburg real estate agent. She claims to have recently spoken with a client. "'I just can't compete in this market,' she informed me with teary eyes,' Raimander recounts. My desire to acquire a home will have to be postponed or sacrificed completely.'"

Here are the figures for a typical residence in the United States: The median home price has climbed to $357,300 from $309,200 in December 2020.

Interest rates increased from 2.67 % to 5.08 % this week for the same time period. With a 10% down payment, the monthly payment has increased from $1,124 to $1,742, a stunning 55 percent increase. On that $357,000 property, that's upwards of $600 every month. This is the result of increased rates and greater prices.

If you just look at interest rates, the two-percentage-point increase we've seen so far adds $115 to the monthly payment for every $100,000 financed over 30 years.

The number of people looking for "homes for sale" on the internet has decreased.

Homebuyers are already feeling the effects of the price shock.

According to Daryl Fairweather, chief economist at real estate brokerage firm Redfin, online searches for "homes for sale" are down 10% year over year. The number of people going to look at houses has decreased slightly as well.

Fairweather said, "We're seeing some very early signals that purchasers are responding to these increased mortgage rates."

Higher mortgage rates may finally bring the sweltering housing market to a halt.

It might not be such a bad thing after all. Finally, the overheated housing market may cool, putting an end to the frenzy of buying and bidding wars.

A slowdown in demand may give homebuilders more time to catch up. A record-low supply of homes is one of the main reasons why prices have risen so dramatically during the COVID-19 pandemic.

"I believe home price appreciation will significantly slow," Fairweather predicts. "In real terms, we're going to have a year of pretty flat home price gains."

Of course, raising interest rates is exactly what the Federal Reserve is attempting to do for the broader economy. The Fed intends to cool rising prices and inflation by making borrowing money more expensive.

However, it is unclear how much higher mortgage rates will rise. Unlike rates on credit cards or other types of loans, mortgage rates move quickly and dramatically in response to what the market anticipates the Federal Reserve will do with interest rates and bond purchases over the next year. Mortgage rates may peak around this time, or they may continue to rise.

Alex Bacon, who lives in the Seattle area, isn't going to sit around and wonder.

"We are extremely excited to relocate," she says. Bacon and her husband are preparing to sell their small starter home, which they purchased about five years ago. It was all they could afford, and it's directly beneath Seattle's airport's flight path. 

Alex Bacon and her husband, Eli Leslie, are in front of their present home, which is conveniently located near Seattle's airport. "I'm just off one of the runways, so the air smells like jet fuel," she explains. The couple is frantically looking for a home to buy before mortgage rates increase. Image: Alex Bacon

"I'm just off one of the runways, so the air smells like jet fuel," she explains. "I can't bring people over for a BBQ because every time you have a conversation, you have to pause for 30 seconds in the middle of your thought," she explains, referring to a 747 roaring overhead.

Bacon realized she can work remotely throughout the pandemic. She works for a medical technology company as a project manager. So the couple's aim was to eventually relocate two hours north to a smaller, more affordable town and purchase a larger home away from the airport.

They are, however, rushing up as interest rates rise. They're packing boxes and getting ready to move as soon as they can afford it.

The couple wants to sell their existing home and relocate two hours north, near the Canadian border. The goal is to work from home so that I can buy a larger property that is not near an airport and has room for home offices. Image: Alex Bacon

"We're starting to see rates around 5%," she adds, "and I'm just so terrified that if they go any higher, we won't be able to afford the house we want up there."

Even with the airplanes, their existing home has appreciated significantly in value in recent years.

Anyone who already owns a house would be in this situation. They are in a far better position than a first-time homeowner because when they sell their current home, they will most likely have a substantial sum of money to put toward a down payment on a new house.

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