Higher mortgage rates are latest headache for D-FW homebuyers

Just in time for the spring housing market, higher mortgage rates are putting more pressure on homebuyers.

Home purchasers in North Texas and across the country were already challenged by the lowest inventories in decades and soaring prices.

Recent increases in home finance costs — albeit small so far — will make it tougher for first-time buyers in particular to put a roof over their heads. The increases since the bottom of the rate market have added almost $70 a month to payments on a $300,000 home loan.

“As mortgage rates move higher, that will affect affordability and demand for homes,” said Frank Nothaft, chief economist with CoreLogic. “In the second half of this year, we will see some gradual lessening of demand because of affordability.”

Average nationwide mortgage costs have risen about a half percentage point so far this year after falling during most of 2020 to the lowest levels on record. Even with this year’s increases, home finance costs are at rates that are some of the best in history and are below where they were a year ago.

But the marginal increases in mortgage rates mean that buyers have to dig deeper to afford a home. “As interest rates gradually move higher — and I do think they will over the course of this year — that erases some of that benefit of low mortgage payments,” Nothaft said.

Combined with double-digit percentage home price gains in North Texas and across the country, homebuyers are forced to spend more in both up front costs and monthly payments.

“With prices up 10%, you as a homebuyer have to have 10% more cash to pay for the down payment,” Nothaft said. “What has gotten worse is the boatload of cash you need to have up front.”

Dallas-Fort Worth home prices have almost doubled in the last decade. And 2020 saw unexpectedly larger home price hikes because of a shortage of houses on the market.

Nothaft believes rising mortgage rates will help corral runaway housing appreciation.

“That’s one reason I think we will see a slowing in home price growth,” he said. “We are going to still post home price growth gain numbers — probably running in the 7% and 8% range in the Dallas-Fort Worth area this year.”

But Nothaft expects D-FW home price appreciation to slow to 3% to 4% year-over-year in the second half of 2021.

North Texas homebuilders who are struggling with a huge backlog of homes that are sold but not yet built might welcome a slight slowdown from higher mortgage rates. “A little bit of moderation will allow builders to catch their breath,” said Ted Wilson, principal with Dallas-based housing analyst Residential Strategies.

“It’s still going to be a very dynamic market.”

Fueled by cheap mortgages, D-FW home starts rose by a third in 2020 to the highest level in a decade.

Wilson said builders will see a further increase in construction in 2021 because they have presold so many houses. “We think that with all this backlog of sales, our starts will surge again in the first and second quarters,” he said. “I’m expecting us to be up to record levels of close to 53,000 home starts.”

But homebuilders remember in 2018 when home mortgage costs went up and homebuyers stepped away from the market. “The recent upward movement in mortgage rates has got everybody’s attention,” Wilson said.

Higher mortgage rates have already put the brakes on the home refinance business, which accounted for the largest share of mortgages in 2020.

Home refinancing volumes have been falling since January.

“As rates move up, the incentive to refinance falls,” said Dougjas Duncan, chief economist with mortgage giant Fannie Mae. “We have downgraded our expected volumes of refinancing this year.

“It’s down about $130 billion from where we were last month.”

Duncan said the recent increases in mortgage costs shouldn’t be enough to deter many homebuyers.

“If they move more than that in a short time period, that could slow housing,” he said. “In the last two months, housing starts have slowed a little bit.

“It could be the uptick in rates is slowing starts just a little bit.”

Demographics and economic recovery will continue to fuel housing demand this year, he said.

“The housing market is still very strong going into the beginning of the year,” Duncan said. “The question is how does the buying public respond as those rates stabilize or maybe drift higher across the course of the year.”