Lenders and real-estate agents say that, even now, all but the most qualified buyers making large down payments face borrowing rates of 5%.
A 5% mortgage rate isn’t that high by historic standards. During much of the decade before the financial crisis, these rates hovered between 5% and 7%. But a return to more normal lending rates won’t feel normal to many buyers who have become accustomed to getting a mortgage loan at 4% or lower, and they could experience sticker shock at what they would have to pay now for a home loan.
“There’s almost a generation that has been used to seeing 3% or 4% rates that’s now seeing 5% rates,” said Vishal Garg, founder and chief executive of Better Mortgage.
For a house with a $250,000 mortgage, rates of 5% add about $150 to the monthly payments compared with the rate of 4% that borrowers could have had less than a year ago, according to LendingTree Inc., an online loan information site. That excludes taxes and insurance.
With rates hitting recent highs at a time when housing prices have been going up, too, some economists suggest sellers may need to lower prices if borrowers can’t afford high prices in a higher rate environment.
Higher mortgage rates have also slowed the housing market more than many expected. That’s a potentially troubling sign for the broader economy, since housing is often a bellwether for how rising interest rates could affect growth overall.
Many buyers who are struggling to find a home they can afford because of high prices are more sensitive to rising rates than they have been in the past.
Existing home sales fell in August from a year earlier, the sixth straight month of declines. Many would-be buyers sat out the buying season because of high housing prices, a historic shortage of homes to buy, and a tax bill that reduced some incentives for homeownership. Higher mortgage rates will likely compound their hesitation.
“With the escalation of prices, it could be that borrowers are running out of breath,” said Sam Khater, chief economist at Freddie Mac.
Once-hot markets are showing signs of cooling down. Bill Nelson, president of Your Home Free, a Dallas-based real-estate brokerage, said that in the neighborhoods where he works, the number of homes experiencing price cuts is more than double the number that are going into contract.
Brad and Virginia Reitinger closed on a new home in Dallas two weeks ago, and opted for an adjustable-rate mortgage so they could get a 4% rate. With a fixed-rate 30-year loan, they would have had to pay 4.5% to 5%, Mr. Reitinger said.
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