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

by Ethan Kim
mortgage rates

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.

Frequently Asked Questions (FAQs) about mortgage rates

What is causing the increase in monthly mortgage payments?

The increase in monthly mortgage payments is primarily caused by rising mortgage rates and a decline in home prices. Higher interest rates on home loans result in larger monthly payments, while the decrease in home prices has a limited impact on offsetting the overall affordability challenge.

How have home prices been affected in recent months?

Home prices have experienced a decline in recent months. According to the National Association of Realtors, the median U.S. home price slipped 0.2% in February, marking the first annual decline in 13 years. In May, home prices continued to fall, dropping by 3.1% compared to the previous year.

Why are mortgage rates increasing?

Mortgage rates are increasing due to various factors. The Federal Reserve’s decision to raise interest rates to slow economic growth and control inflation has contributed to the rise. Additionally, market conditions, such as high demand for housing and limited inventory, can lead to higher rates as lenders adjust to the supply and demand dynamics.

How is this impacting homebuyers’ affordability?

The combination of rising mortgage rates and a decrease in home prices is straining homebuyers’ affordability. With higher monthly payments, prospective buyers are finding it more challenging to afford homes, especially when paired with low housing inventory. This situation puts pressure on potential buyers and limits their options in the housing market.

Are there any predictions for future mortgage rates?

According to a forecast by Realtor.com, the average rate on a 30-year mortgage is expected to decrease to 6% by the end of the year. However, it’s important to note that lower rates can have conflicting effects. While they may incentivize some homeowners to sell and increase housing inventory, they can also attract more buyers, leading to increased competition and potentially driving up prices again.

More about mortgage rates

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

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PropertyInvestor101 July 7, 2023 - 12:30 pm

home prices finally going down, but wait… mortgage rates are going up! ugh, can’t catch a break. higher payments and limited inventory, how am I supposed to invest in real estate now?

HomeBuyerProblems July 7, 2023 - 2:41 pm

omg, can’t believe mortgage payments jumped 14.1% in May! that’s a lot of $$$$. and home prices falling? well, that’s something. but with rates so high, who can afford it anyway?

RealEstateLover89 July 8, 2023 - 2:09 am

rising mortgage rates leading to higher monthly payments even as home prices ease. oh no, this is not good for homebuyers trying to afford their dream house. hope rates go down soon!


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