Higher mortgage rates, tight inventory and fluctuating prices create a storm of uncertainty
August 25, 2022 at 7:00 a.m. EDT
Starr Davis, her husband Devin and their children David and Parker in front of their new home in Coral Springs, Fla., on Aug. 14. They were outbid on several listings before finding the three-bedroom property.
When Starr Davis and her husband, Devin, began shopping for a home earlier this year in Broward County, Fla., they were prepared to endure a real estate landscape marked by tight supply and soaring home prices.
But things got even tougher for the couple in spring when the monthly rent on the townhouse they shared with their two young children increased by $1,000.
Rising mortgage rates only added to their challenge: After two years of record-low levels, borrowing costs began their steady climb earlier this year and now stands at levels not seen since before the pandemic. The Federal Reserve lifted rates by three-quarters of a percentage point in June and again in July, marking the most aggressive pace since the 1980s.
It started to feel like all of these factors were creeping in at the same time,” says Davis, 38, who runs a nonprofit aimed at protecting children from child sexual abuse and exploitation. The couple relocated to Florida from Atlanta last year where they had been homeowners for years and viewed extending their rental lease as “just throwing money away,” Davis says.
After being outbid on several listings, the couple eventually found a three-bedroom house in Coral Springs with the help of Laurane Simon, a broker with Keller Williams Realty Partners SW in Pembroke Pines, Fla., and a member of the National Association of Real Estate Brokers, the oldest black real estate trade association in the country. Simon primarily focuses on African American first-time buyers, better educating them on everything from securing a home loan to budgeting for a down payment.
More cities seek to redress widespread 20th-century destruction of Black neighborhoods
Davis and her husband closed on the sale on their home, listed at $400,000, in June.
“There were definitely moments when we thought this wouldn’t happen,” says Davis. “But I’m really glad we stuck it out and eventually found a home that fit our budget and our family.”
Home buyers in the United States are facing one of the most challenging real estate markets in decades as rising interest rates, a limited supply of homes and soaring prices threaten to slow a property market still in the midst of a historic rise.
Climbing rental prices and high inflation are exacerbating the problem, financially squeezing many first-time buyers attempting to save enough for a down payment.
The median rent across the 50 largest U.S. metropolitan areas rose by 23.9 percent year-over-year in June to $1,876, a new record level for Realtor.com data for the 16th consecutive month. The inflation rate in the United States, meanwhile, reached 8.5 percent in July, a slight dip from the four-decade high of 9.1 percent in June, Labor Department data show.
Yet while these factors affect all home buyers, housing advocates and real estate researchers warn that the tsunami of financial challenges is threatening to dampen the prospects of a demographic that has enjoyed one of the sharpest spikes in homeownership rates during the pandemic: minority home buyers.
And the landscape may be toughest for younger buyers of color, particularly Black and Hispanic millennials, a demographic that has taken advantage of historically low borrowing rates over the past several years to make major gains in homeownership rates.
“Many of these buyers are on the economic margins to start with,” says Gary Acosta, chief executive of National Association of Hispanic Real Estate Professionals (NAHREP), an industry group aimed at advancing Hispanic homeownership.
The Latino homeownership rate increased to 48.4 percent in 2021, up from 47.5 percent in 2019, the highest level since the mid-2000s, according to data by NAHREP. The Black homeownership rate reached 43.3 percent in 2020, up from 42.1 percent in 2019, census data shows.
Advocates push nationwide movement for land return to Blacks after victory in California
Despite the encouraging numbers, Acosta worries that the exceptionally difficult conditions emerging in this housing market will lock younger minority households out of homeownership and the opportunities at wealth-building it can provide.
“They’ve already been threatened by higher home prices and unusually tight supply in many expanding markets for minority buyers,” Acosta says. “So rising interest rates and higher rental costs will certainly add more challenges and hurdles at a time when many of them are looking to own their first home.”
Despite a recent cooling in property prices – and a dip in the overall number of sales across the country – the cost of a home is still up 20 percent since August 2020 and up 36 percent since 2019, Redfin data shows.
The median sales price of an existing home fell in July to $403,800 from a record $413,000 in June, the first drop since January, according to the National Association of Realtors.
While price growth is slowing in some pricey markets — with home sellers increasingly cutting asking prices — economists are split on whether prices will drop on a nationwide basis by year’s end.
Despite a recent cooling in the overall number of home sales across the country, home prices are still rising at a record pace.
The median sales price of an existing home reached $416,000 in June, up 13.4 percent on the year and the highest since records began in 1999, according to the National Association of Realtors (NAR). While price growth is slowing in some markets — with home sellers increasingly cutting asking prices — median home prices in the United States are still up 30 percent since July 2020 and up 39 percent since 2019, Redfin data show. Many economists think prices are unlikely to drop on a nationwide basis.
For Black homeowners, a common conundrum with appraisals
And though the inventory of homes for sale is increasing, that figure still remains low with just a three-month supply of unsold homes, according to Realtor.com. Most real estate economists suggest a five- or six-month supply of homes signals a healthy housing market.
“The same dynamics that existed for many first-time buyers, particularly buyers of color, during the pandemic are essentially still in place,” says Jessica Lautz, vice president of demographics and behavioral insights at NAR.
She says because younger, minority buyers typically carry more student loan debt than their White counterparts and lack the kind of intergenerational wealth that could help with things like a down payment, the current landscape is more challenging for millennial buyers of color. “And when we add rising rates and affordability issues into this mix, it creates hurdles for all home buyers, but it’s particularly challenging for first-time minority buyers.”
Odeta Kushi, deputy chief economist for real estate data and title company First American Financial Corporation, says millennial home buyers across all demographics are facing a unique set of headwinds that could dampen the house-buying power of a group that’s crucial to the overall housing market.
“These are people in their prime home-buying years that are in a market that’s been undersupplied for years and that’s particularly acute at the starter stage,” says Kushi. “So even if they’re seeing their incomes rise, as many are, rising rates and higher prices will still erode affordability and that could keep them on the sidelines.”
Artemisa Boston, a real estate broker in St. Paul, Minn., for Realty Group, says like other metropolitan areas around the country, the market there is starting to get less competitive for buyers with homes sitting on the market longer and more sellers willing to cut prices.
But she says many of her clients started looking for homes earlier in the year when rates were at 3.5 percent. But now, as rates hover near or above 5 percent, some of them have decided to wait for the market to shift.
“Home prices were already high in this market, so for many of my clients, especially the younger ones, watching rates go higher means the overall cost of the home gets more expensive,” says Boston, a bilingual agent who caters to the Twin Cities’ growing number of Hispanic home buyers. “The higher monthly payments that come with rising mortgage rates means that more buyers are willing to wait until they find something within their budget.”
That’s what Martha Hernandez and her husband, Gustavo, decided to do. The couple began the year searching for a home in the Twin Cities with Boston’s help. But navigating rising rates as home prices remained high amid tight supply got increasingly more difficult. Median home prices in the Twin Cities reached a record $380,000 in June, up 8.6 percent from a year earlier, according to data from Minneapolis Area Realtors.
“It means the house we thought we could afford in February or March is no longer really affordable,” says Hernandez, 55, who works for a housekeeping and cleaning services company. Her husband is a manager at a painting and drywall company.
“Each time the rates went up it meant it was a little more expensive to buy a home,” she says. “So even though we decided to wait for now we are still hoping to find something in our budget.