Ten years after the U.S. housing market collapse, the Federal Reserve is now on a path to higher interest rates.
Today’s economy is much healthier than 2008. It’s nearing full employment, corporate America is racking up record profits, and the Federal Reserve is finally tightening its monetary policy.1
As a result, mortgage interest rates have risen almost 50 basis points since the beginning of 2018, and in May, they reached their highest levels since 2011. After years of sub-four percent rates, it looks like mortgage interest rates are finally beginning a sustained upward trajectory.2
What does this mean for prospective homebuyers?
A 0.5 percent bump in mortgage rates may not seem like much, but that increase raises a monthly mortgage payment by $28 per $100,000. Today, the average median home price in the U.S. is approximately $250,000. But if you calculate an additional $840 in payments per year for 30 years, your $250,000 house may actually cost you $275,000.3
With figures like that, it’s easy to understand why 27 percent of prospective homebuyers said they’re slowing down their house hunting, and six percent said they’re canceling their search altogether, resulting in mortgage applications decreasing four times since mid-March 2018.1,4
Homebuyers, particularly first-time buyers, are feeling squeezed out of an already competitive market with rising prices and a limited number of listings. And Zillow forecasts that if rates increase by 0.4 percent, and hit five percent by the end of the year, 17 of the nation’s 35 largest markets would be less affordable than the historic average. If rates hit six percent, that number increases to 20.5
Where do priced-out homebuyers go?
In most cases, priced-out homebuyers look to renting as an affordable alternative. But for many of them, renting has evolved from a short-term plan B to a long-term solution as it becomes increasingly more difficult to find affordable houses. As a result, demand for apartments is higher than ever.
Over the last year, median rent in the U.S. rose 2.8 percent to $1,445, the fastest pace in growth since May 2016. Additionally, the national occupancy rate reached 95 percent at the end of 2017, with the potential to increase further in the coming months. And while new construction is underway in many major-urban markets, it is primarily luxury, Class-A complexes with rents upwards of $2,000 per month. And without updated, affordable options, renters can expect to see rents continue to move higher, potentially impacting longer-term homeownership goals.6
The growing need for affordable apartments
Assuming that the economy continues to improve and the Fed stays its course of tightening monetary policy, mortgage rates will continue to climb. The combination of higher mortgage rates and rapidly rising home values is likely to push some would-be buyers to more affordable housing options – affordable apartments.