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Mortgage rates top 5% as homebuying becomes ‘most expensive in a generation’

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A “for sale” sign is displayed outside of a house in Layton on Oct. 14, 2021.

A “for sale” sign is displayed outside of a house in Layton on Oct. 14, 2021. A Thursday report from U.S. government-backed mortgage giant Freddie Mac shows the average lending rate for a 30-year fixed rate mortgage hit 5% this week, up almost two percentage points from just a year ago and a number likely headed even higher in the coming year.

Shafkat Anowar, Deseret News

A Thursday report from U.S. government-backed mortgage giant Freddie Mac shows the average lending rate for a 30-year fixed rate mortgage hit 5% this week, up almost 2 percentage points from just a year ago and a number likely headed even higher in the coming year.

“As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation,” Freddie Mac wrote in a note accompanying the new mortgage data.

While average U.S. mortgage rates have been increasing at the fastest rate in more than 30 years for the last three months, the 5% benchmark comes just a month out from a Federal Reserve increase of .25% to the federal lending rate. The increase is the first in a series of planned upward adjustments by the Fedas the monetary policy body attempts to put the brakes on rising inflation.

Higher rates from the Fed will heighten borrowing costs for mortgages, auto loans, credit cards and corporate loans. In doing so, the Fed hopes to cool economic growth and rising wages enough to rein in high inflation, which has caused hardships for millions of households and poses a severe political threat to President Joe Biden.

Many economists have said they worry that the Fed has waited too long to begin raising rates and that the policymakers might end up responding so aggressively as to trigger a recession

Earlier this week, the Department of Labor reported the annual U.S. inflation rate hit 8.5% in March, the highest since 1981. And Utah was among a group of Mountain West states feeling even tougher inflationary pressure with a nation-leading annual inflation rate of 10.4% in March.

So, what does it mean for a current homebuyer?

According to Thursday reporting by the Wall Street Journal, buying the median American home at prevailing rates a year ago meant a monthly mortgage bill of about $1,223 after a 20% down payment, according to calculations by George Ratiu, an economist at Realtor.com. At recent rates, such a purchase would require a monthly payment of nearly $1,700 — a 38% increase, he estimated.

And in the West, especially for buyers in high-demand states like Utah, impacts of ongoing rate increases could be even worse.

Last month, as the nation’s average 30-year fixed mortgage rate was nearing 4%, a striking 67% of Utah households were already being “priced out” of the state’s median-priced home, according Dejan Eskic, senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute who specializes in housing research.

“It’s bad,” Eskic said.

Utah’s median-priced, single-family home was $512,000 statewide in the fourth quarter of 2021, according to the National Association of Realtors.

“A good two-thirds of Utah cannot afford the median-priced home anywhere because of how fast rates rose in the last couple of months,” Eskic said in the March story.

“If you were going to wait to buy in the spring, you’re likely out of luck,” Eskic said, as rising interest rates push even more homes out of reach with higher monthly loan payments.

Utah’s housing problem continues to be a supply and demand issue — so shouldn’t rising interest rates help by dampening demand?

Not in today’s market, Eskic said.

Rising interest rates will slow demand, he said, but not “enough to completely slow the market down because there is nothing to buy.”

The COVID-19 pandemic upended the whole nation’s housing market as thousands of Americans reevaluated their lives and moved out of big cities in search of more space at lower price points. Many looked West, especially to states like Utah, where jobs flourish, and Idaho, where housing was comparably affordable.

As a result, states like Utah and Idaho have seen record-shattering years for house sales and price increases. In Utah, experts have warned of a “severely imbalanced” housing market as demand continues to woefully outpace supply.

But this isn’t just the fault of the pandemic. It only compounded and accelerated Utah’s housing problem. The West’s housing shortage began years ago amid the Great Recession, after the subprime mortgage crisis sent the nation’s and the world’s economy into a death spiral. After the crash, homebuilding contracted, and the market has been struggling to keep up with demand ever since.

Contributing: Associated Press