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The good news is Americans are making more money – because they're going to need it, especially people thinking about buying a home.
While the just-released January employment report showed job growth that topped expectations, to go along with a nice gain in wages, it also sent bond yields soaring. Mortgage rates loosely follow the yield of the 10-year Treasury. Bond yields have been rising for weeks on strong economic data domestically as well as changes in international monetary policy, but this move was the most dramatic.
The average rate on the 30-year fixed-rate mortgage is at its highest level in four years, about 4.5 percent, and for some lenders, it is even higher.
"This isn't a knee-jerk reaction to some headline event. It's a broad-based, deliberate move," said Matthew Graham, chief operating officer at Mortgage News Daily. "A quick return to December's levels is unlikely, even though we may get some relief on the way higher. How much higher is hard to say, but at a certain point, high rates are self-correcting. We're probably at least half-way to that magic line in the sand."
Boiling the change so far down to a monthly payment, if a borrower took out a $200,000 mortgage in the middle of December, when the average rate was around 3.875 percent, they would have had a monthly payment of $940 (that's not including taxes and insurance). If they were to take out that same loan today, the monthly payment would be $1,013.
While $73 a month may not sound like a lot to some, this is just a best-case scenario. Depending on your creditworthiness, it could be a bigger difference. For some borrowers on the margins, they may no longer even qualify for the loan. Lenders today are required to make sure the borrower has the ability to repay a loan, based on income and other expenses. If the monthly payment is even slightly higher, some borrowers may not make that ability-to-repay standard.
For those out house hunting already, the higher rates will only add to the weakening affordability in the market. Home prices continue to move higher at three times the rate of wage growth. In some large metropolitan markets, annual price gains are in the double digits.
Prices are also growing fastest at the lowest end of the market, where entry-level buyers have even less ability to increase their buying budgets. These buyers are also far more mortgage-dependent than those at the high end.
Of course, mortgage rates are still historically low, looking back over the past few decades. Rates have soared higher than 10 percent in the past, and the market survived.
The difference now is that home prices over the past few years have been able to gain so much because borrowing costs were so low. What's pushing prices higher now, however, is not low rates, but a severe lack of supply. That means higher rates are unlikely to put any chill on the rise in prices. Demand for housing is still strong, but buyers today will have to dig deeper to become homeowners.