House prices would have to drop that much for buyers to get a break

Since home prices entered the stratosphere, many first-time buyers have been praying they would come down so they could afford to become homeowners. It seems that their wishes have been granted - and yet, they are trapped in a paradox: even as prices began to fall, the cost of buying a home increased. Much.
The reason for the discrepancy: the mortgage interest rate is rising.
Most people still focus on the price tag of a property. In fact, this kind of list price obsession is deeply embedded in the American psyche. But, of course, buying a house is very different from buying products from a brick-and-mortar store or shopping online. Unless home buyers are buying all cash, they will take out a long-term loan to finance their purchase. And there is a heavy cost to borrowing this money - which rises when mortgage rates rise.
At the national level, the median mortgage payment is currently about 77%* higher than a year ago. Most of this increase is due to the higher rates, which rose from the low range of 3% and hovered around 7% for 30-year fixed interest loans. And that completely improved the likelihood equation.
"The interest rate is absolutely important," says Realtor.com® Senior Economist George Ratio. "The mortgage rate can make or break someone's ability to purchase a home almost regardless of price."
For these payments to return to where they were just a year ago, home prices would have to drop by 45% (assuming rates stay where they are). Let that sink in for a moment. If mortgage rates rise to 8%, prices would have to drop by about 50% to return to last year's payment ranges.
Mortgage rates make so much difference.
"The prices will have to drop significantly for apartment buyers to feel that they are really getting a bargain," says Ratio. "If we had stayed at an interest rate of about 3%, the drop in prices could have given people an opportunity to get a bargain or something that is actually more profitable. But with the rates... they are not expected to return to these 3% levels anytime soon, even a 10% drop in prices will not offer much of a bargain."
Apartment prices are not expected to drop
The chance that apartment prices will drop by 45% is extremely slim. Prices have fallen slightly from their peaks during the spring and summer, but they are still rising every year. Most real estate experts expect only about a 10% decrease at the national level, although the exact amount is expected to vary widely throughout the country.
"It's quite rare that house prices really go down. It doesn't happen very often," says Padraic Garvey. He is the head of regional research, Americas, at the multinational banking and financial services company ING.
During the Great Recession, home prices fell only about 30% from their peak in the 2000s after the housing bubble burst. This was largely due to subprime, predatory defaulted loans, a wave of foreclosures that flooded the market with affordable housing, and more homes for sale than there were buyers.
Today, those risky mortgage loans have largely been eliminated. Only the most qualified buyers - the ones least likely to go into foreclosure - get loans. And instead of an abundance of housing, there is a severe shortage of properties for rent and sale with far more buyers and renters than available homes. This keeps a floor below prices, preventing them from falling too far.
"Those who say, 'What goes up, must come down,' I appreciate that they want to think about the economic theory behind prices," says Lisa Sturtevant, chief economist for Bright MLS, a multiple listing service covering the Mid-Atlantic region. "But the supply has to increase significantly if we expect a big drop in prices, and we just haven't been building enough housing for years and years."
Low rates helped fuel the historic rise in home prices during the COVID-19 pandemic. Because buyers spent less each month on mortgage interest, they had more money to put toward homes. This precipitated a real estate frenzy that resulted in frantic bidding wars, investors buying almost everything in sight, and six-figure bids over the asking price.
Now that rates have risen, increasing the amount that today's new homeowners must part with each month, buyers don't have as much money to spend on the actual home. Their money goes to the lender instead. So prices had to drop a bit.
"I expect to see prices come down from their highs. But in most markets, prices will [still] be 10%, 20%, 30% higher than they were in 2019 before the pandemic," Sturtevant says. "
Monthly mortgage payments have skyrocketed in the past year
Last October, the median mortgage payment was $1,245.48 per month nationally. A year later, buyers were spending about $1,000 more per month – for the same property, not including taxes or insurance costs. However, apartment prices only increased by 13.3% year-over-year in October. So that means most of the extra cash they spent came from higher rates
Over the life of a 30-year loan, buyers will pay $345,247.20 more than they would have if they had closed a year earlier. That assumes they don't refinance their loans if interest rates go down, of course.
"It's a lot of money," says Sturtvant. "This has a big impact on household budgets."
The interest rate on the mortgage can continue to rise
The mortgage interest rates have a reasonable chance of continuing to rise upwards - to the dismay of the apartment buyers.
The US Federal Reserve raised its interest rates as a way to curb inflation. Mortgage rates, which are separate, generally follow the path of the Fed, rising when the Fed's interest rates rise and falling when the Fed lowers its own.
The Fed usually lowers interest rates only to give the economy a boost when it needs one, which is what happened during the pandemic.
"The only way I see mortgage rates stopping their upward trajectory is if the economy plunges into a severe recession," Ratio says.
* This calculation looks at October 2022 and 2021 median home prices from Realtor.com and average weekly mortgage rates for 30-year fixed rate loans in the last week of October, using data from Freddie Mac. Taxes and insurance costs are not included.

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