Rising Mortgage Rates Lead to Increased Monthly Payments Despite Home Price Decline

Even as home prices begin to decline, prospective homebuyers are willing to bear the burden of higher mortgage payments.

According to the Mortgage Bankers Association, the median monthly payment listed on applications for home purchase loans reached an all-time high of $2,165 in May, marking a significant 14.1% increase from the previous year. Additionally, this figure represents a 2.5% rise from April.

In a recent release, Edward Seiler, the MBA’s associate vice president of housing economics, stated, “Homebuyer affordability eroded further in May as prospective buyers continue to grapple with high interest rates and low housing inventory.”

The size of the mortgage and the interest rate are influential factors in determining the monthly payment for a 30-year fixed-rate mortgage. Both of these variables have experienced significant growth in recent years.

During the pandemic, home price growth surged due to historically low mortgage rates and fierce bidding wars resulting from limited housing supply. Although the market cooled after the Federal Reserve raised interest rates to curb economic growth and inflation, home prices remained resilient until February. According to the National Association of Realtors, the median U.S. home price experienced a slight decline of 0.2% compared to the previous year, marking the first annual decrease in 13 years.

Since then, home prices have continued to decline, with a recent drop of 3.1% in May compared to the previous year, resulting in a median price of $396,100, as reported by the NAR.

Despite the decline, the national median home price remains nearly 40% higher than it was three years ago. In contrast, the average rate on a 30-year home loan has reached a new yearly high of 6.81%, more than double the rate from two years ago, according to mortgage buyer Freddie Mac.

With the combination of declining home prices, rising mortgage rates, and limited inventory, mortgage payments are increasing, placing a strain on the affordability of many prospective homebuyers.

To put it into perspective, two years ago, the median national monthly payment for home loan applications was $1,320.48, which is 63.4% lower than the current monthly payment.

Realtor.com’s recent forecast predicts a drop in the average rate on a 30-year mortgage to 6% by the end of the year. Lower rates might incentivize some homeowners to sell, thereby increasing the much-needed housing inventory. However, lower rates could also attract more buyers, leading to heightened competition and subsequent price increases.

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• Mortgage Bankers Association: Link
• National Association of Realtors: Link
• Freddie Mac: Link
• Realtor.com: Link