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Rise in mortgage rates threatens to slow the US housing rally

(Bloomberg) – The pandemic real estate rally receives its first major test. Mortgage rates have risen for the past three weeks, due to the fact that inflation will pick up as the US economy recovers this year. While the cost of borrowing is still near historic lows, the rapid jump has already begun to undermine the purchasing power that has allowed buyers to boost property prices across the country in recent months. The bidding frenzy was one of the big surprises of the pandemic. When the lockdowns were lifted, buyers – armed with low mortgage rates – emerged with a newfound urgency to purchase properties with space for home offices and the Zoom school. The competition for scarce supply was a dramatic shift as millennials, who’d spent years renting in urban centers, came into the first age of home buying. The question now is can the market stay hot when interest rates rise. “The reasons people are trying to buy homes right now are beyond mortgage rates,” said Danielle Hale, chief economist at “I don’t think the demand will let up, but it will create another hurdle as people navigate how to get into the market – especially for younger first-time buyers.” Last week the average price for a According to Freddie Mac, the 30-year fixed-rate mortgage rose above 3% for the first time since July. This is above the record low of 2.65% reached in early January. Even small changes in interest rates can have a big impact on buyers. In a report this week, Redfin Corp. calculated that increasing mortgage rates from 2.75% to 3.25% would mean a borrower with a monthly home budget of $ 2,500 would lose $ 23,250 in purchasing power, according to Redfins’ analysis, in the % of homes would be affordable to buyers in the US between January 26th and February 25th. That equates to about 70% for lower mortgage rate buyers in Denver and Sacramento, California, where the proportion of homes affordable for that budget would drop 3.7 percentage points. At the moment, however, rising borrowing costs do not seem to result in an exit from the market. Buying activity has cooled off a bit in the past few weeks but is still at the same level as a year before the pandemic, Freddie Mac said last week. In the Denver area, Carlos Gomez and his girlfriend Angela Davies were initially surprised to find out they could afford a $ 450,000 home and still stay within their monthly budget thanks to the lowest cost of borrowing. Now that rates are rising, they might be forced to look at a lower price where there is even less real estate available, Gomez said. “It will put us out of the game,” said Gomez, adding that they had already lost two houses to cash buyers. For Tammy White, a teacher in Sacramento, the timing couldn’t be worse. She cleaned up her credit last year to qualify for a mortgage and buy a home. Now she is concerned that higher borrowing costs will lock her out of the market because she is unwilling to make a commitment that prevents her from doing activities for her busy 5 year old to pull out, ”White said. “I’m not going to outbid these houses where I’m turning a loan upside down. I try to be smart. “Even if some buyers are more reluctant about what they can pay for, property prices are likely to continue to rise rapidly due to underlying demand and scarcity,” said Zillow economist Matt Speakman. Still, in the future, buyers will have to get used to paying more for mortgages. “It sure looks like the days of the lowest interest rates ever are behind us,” said Speakman. “By and large, the pressures on interest rates will continue to rise as the economy continues to improve.” For more articles like this, visit Subscribe us now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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