First-Time Homebuyer Affordability Worsens As Mortgage Rates Jump Most Since 2013 Taper Tantrum 

Housing unaffordability soared to a three-year high and could progressively worsen as the monetary wonks at the Federal Reserve prepare for one of the most aggressive (and possibly most ambitious) rate hike cycles in decades. If the Fed gets six or more rate hikes in before December – as the market is pricing-in currently – mortgage rates could scream higher, driving unaffordability to levels that could then reverse the red hot housing market.

“The strength of price gains are associated with the strength of the local job market, but the escalating prices took a toll on home shoppers, compelling many to come up with extra cash, and forcing others to delay making a purchase altogether,” said Lawrence Yun, NAR chief economist.

“A number of families, especially would-be first-time buyers, are increasingly being forced out of the market, and this is why supply is critical to expanding homeownership opportunity.”

The National Association of Realtors (NAR) reports mortgage payments for first-time homebuyers in the fourth quarter of 2021 jumped to 25.6% of their household incomes, the highest in three years and up 3.2 percentage points from the same quarter last year. 

Soaring home prices and rising mortgage rates are a dangerous cocktail for first-time homebuyers.

“Homebuyers in the last quarter saw little relief as home prices continued to climb, albeit not as fast as earlier in the year,” said Yun. 

“The increasing prices are indicative of a seller’s market, with an abundance of eager buyers and very limited supply.”

NAR said the increases added about $200 to a typical home-loan payment. The 28/36 rule, a personal finance guide that limits how much money should go to housing costs and monthly debt payments, shouldn’t exceed 28% of a household’s monthly pre-tax income and 36% of total debt; this is also known as the debt-to-income ratio.

The squeeze in affordability will worsen if mortgage rates soar. St.Louis Fed president Jim Bullard went full hawktard Thursday after the Biden White House appears to have greenlit The Fed to crash the economy:

• *FED’S BULLARD FAVORS 100 BPS INTEREST-RATE INCREASES BY JULY 1

• *BULLARD FAVORS FIRST HALF-POINT U.S. RATE INCREASE SINCE 2000

Bullard’s hawkish statements come as mortgage rates topped 4% and have experienced the most significant multi-month jump since the taper tantrum days of 2013. 

As the cost of borrowing rises and the median price for an existing single-family house jumped 14.6% last quarter to $361,700, it appears red hot home prices could begin to cool.

But, for now, as RedFin notes, only 2.8% of listings saw any price drop…

“Movers are feeling a big pinch. There is nowhere for them to run from increasing housing costs now that mortgage rates are rising and inflation has spread to the rental market,” said Redfin Chief Economist Daryl Fairweather.

Perhaps, amid all this rate-hiking gloom, there is a silver-lining for anxious first-time homebuyers as The Fed controls the short-end only in its attempt to quell inflation – raising the cost of funds for institutional investors who have dominated the real estate markets in recent years…

…and perhaps, just perhaps, removing that (investor) marginal buyer that has bid prices to record levels of unaffordability, especially in these cities (10 cities with most investor activity in real estate)…

…and at the same time, the longer-end of the yield curve will come under pressure from Fed policy error and recessionary concerns…

…potentially lowering mortgage rates for the average homebuyer and improving affordability.

That is hope, not a strategy, but still – the American Dream may just peak back through for today’s first-time homeowners sometime soon.