These days, Andrea and Mike Johansen aren’t living their best lives. It’s temporary but the couple are crammed into a small camping trailer on their parents’ farm in western Massachusetts, across from a barn with 100 very noisy chickens.
“It starts at around 4:30 in the morning,” says Andrea. “You try to get zoom calls for work and when the sun starts to go down they start over…go crazy.”
The Johansens thought they would now be in a newly built house. But with supply chain delays, it’s not over. And so what was supposed to be a quick stay in the motorhome between the houses drags on.
For the Johansens, it looks like a $360,000 mortgage will cost them about $800 more on the monthly payment. And it’s going to be tough.
“We live in the caravan because we can’t afford to live anywhere else,” says Andrea. “Our goods are in storage and that represents close to $1,000 a month. »
Mortgage rates have skyrocketed. From 3% at the start of the year to nearly 7% for two weeks for a 30-year fixed rate loan. Rising rates have slowed the pace of home sales for 7 straight months as frustrated buyers give up and give up, unable to pay the biggest payments.
Mike is CPA and Andrea works as an engineer. They can afford the higher mortgage payment, but that means they can’t spend or save money for other important things.
“I’m 41,” says Andrea. “I need to save for my retirement.
This spike in mortgage rates means some people are giving up on buying a home altogether. In Colorado, Hillary Tollerud-Ho, 32, had also agreed to buy a new house. But with the higher rates, she and her husband can no longer qualify for a mortgage.
“We were told we had to pay my husband’s credit card and have a $100,000 down payment,” she says. “There’s no way we had that.”
The couple lost a $1,000 deposit they had put down. And they could have lost more. “Fortunately, the builders were more than understanding,” she says. “They didn’t need it, according to the contract we signed, but they returned the $5,000 deposit.”
Rising mortgage rates are putting homeownership out of reach for millions. And as a result, it’s no longer a frenetic housing market with bidding wars and multiple bids on every home. These days, a real estate agent can hold an open house and no one shows up.
“What we are experiencing now feels like a hangover from this housing market party that had been going on for two years,” says Daryl Fairweather, chief economist at Redfin. “This party was fueled by cheap Federal Reserve debt, and now inflation is ending the party.”
The Fed kept rates rock-bottom after the pandemic hit, fearing business shutdowns could trigger a severe recession. But these extremely low rates combined with strong demand have fueled an astonishing increase in house prices – between 30-40% in just 2 years depending on which housing index you look at.
Now, to fight inflation, the Fed is aggressively raising rates. And mortgage rates have more than doubled this year. This threw cold water on the housing market.
Apart from a brief dip when the pandemic hit, sales are the slowest since 2015. Home prices are down slightly, about 6% from their peak in June. But Fairweather doesn’t see any big price drops coming.
“We expect house prices to be flat next year,” Fairweather says. She says the housing market has held up well given the rise in rates. “A recession could change its strength, but right now it’s incredibly strong.”
The main factor supporting prices is the housing shortage that dates back to the last housing crash. Many builders lost money. And for a decade, the pace of residential construction has lagged behind demand. So even other economists who think prices could fall 10-20% nationwide from their recent highs still aren’t predicting a dramatic price drop. The supply of housing is still too limited.
“Rising and falling mortgage rates do nothing to solve the housing shortage,” Fairweather said. “It’s going to be there.”
Back at the henhouse, Andrea and Mike Johansen are hoping the rates will drop before their home is finally built so they can qualify for a lower rate.
In November, Andrea says with a slight optimism, “maybe they’ll drop a bit by then, maybe?” Her husband says he doesn’t think that’s likely.
“I don’t think that will happen either,” Andrea says. “But there are wishes, hopes and prayers.”