How rising mortgage rates are increasing the cost of living for millions of Americans

Amna Nawaz:

The Federal Reserve may not have hiked interest rates today, but that didn't provide much relief to many struggling with the burden of the higher costs of borrowing.

The Fed series of hikes over more than a year has triggered a big jump in mortgage rates, pushing them to their highest level in more than two decades. We're going to focus on what this has meant for potential and current homeowners, but, first, perspectives from borrowers and a real estate broker.

Barb Thompson, Nebraska:

My husband recently retired, and so we're looking at possibly building a home that would be something that we could age into and something that would be adaptive should we need those services in our future.

Chuck Dalldorf, California:

My wife and I relocated from another state back to California to be closer to family. We are all very lucky to be retired, and the — just we sold our home and have been looking very aggressively for the last year.

Nichelle McDuffie Hagins, KTKG and Associates: The reality is, a lot of buyers have backed off and have slowed down their pursuit of purchasing a home, because not only are the rates higher, but so are the prices. And demand — inventory is slow as well.

Barb Thompson:

The recent increases in interest rates has really thrown a wrench into our plans. Things that we were hoping to do, for instance, going from a three-bedroom to two-bedroom, it's really changing the size scope because of the cost of building.

Chuck Dalldorf:

My wife and I are both retired on a government pension and we are incredibly lucky, as opposed to a lot of other Americans who are out there and have difficulty with their wages and the high cost of housing. As interest rates continue to rise, more people, I think, feel like they are locked into their existing situation.

Nichelle McDuffie Hagins:

Even though inventory is low, there are still houses on the market, whether it's a new homes built, or house in a neighborhood that's available.

Yes, it's a challenge. Sometimes, you may not move exactly in the neighborhood you wanted, but you may find a place that is even better close to where you were looking.

Chuck Dalldorf:

The marketplace is so confusing right now. It appears that, because of the higher interest rates, a lot of homeowners who may want to or need to sell their homes are unable to or unwilling to because they had such a low interest rate when they bought.

And, frankly, the marketplace is so hyperactive, in a way, that housing prices have gone up, interest rates have gone up, and it makes it very difficult for people to sell their homes even if they need to.

Nichelle McDuffie Hagins:

I definitely don't advised that they wait until the rates go down. You will find that there will be programs that are available to assist others in getting in homes that won't be available if the rates were down.

Barb Thompson:

I'm in the Midwest area, but it seems like most of the homes that are being built in our area are these very large homes, and they're starting at $400,000 or $500,000.

And I look and say, who could afford to build that? It's just very difficult when you think of the housing availability. When you look at my husband and I, and we aren't selling our home because we're afraid of not being able to find something that we can afford, and then you look at young people not being able to find starter homes in a price range that they can afford, it's a very, very tense and tough time for people.

Amna Nawaz:

Some further insight on all this now from Daryl Fairweather, who watches all of this very closely as the chief economist for the real estate company Redfin.

Daryl, welcome. Thanks for joining us.

Daryl Fairweather, Economist, Redfin:

Thank you for having me.

Amna Nawaz:

So, I want to dig into the details of what we heard from those folks in just a moment, but big picture, what is your reaction to the Fed's decision today not to raise rates? How do you view that from your perch?

Daryl Fairweather:

It seems like interest rates are going to remain elevated for the short term, which is more of the same for the housing market, in terms of not many transactions happening.

We have seen both sellers and buyers pull back in this high interest rate environment, which means, even though there are very few sales, home prices remain elevated because of the lack of inventory. So it's just a really difficult market. And I don't see it really improving until rates fall.

Amna Nawaz:

Let's talk a little bit more from that potential homebuyer perspective then.

We heard from some folks they're having to make very tough choices about whether or not they might buy. What do you say about the extent to which this is forcing some potential homebuyers and borrowers into really tough choices, right, particularly for lower-income households, people who have less-than-ideal credit?

What are their challenges now?

Daryl Fairweather:

In most parts of the country, it's cheaper to rent than it is to buy right now. But that's only for the short term, for the next year.

Who knows what's going to happen with rents when they go up? And then it may be even more difficult to buy later on. Even if interest rates fall, competition would likely heat up and it would be another difficult housing market.

So, first-time homeowners, especially have a difficult dilemma. Do they save money in the short term and rent another year? Do they try to get into the housing market now before it becomes even more difficult to get in?

Amna Nawaz:

And what about for existing homeowners? We heard that one gentleman say people feel like they're locked into their situation. Is that what you have been seeing?

Daryl Fairweather:

Yes, many homeowners were able to lock in record low mortgage rates during the pandemic, which lowered their monthly mortgage payments.

And if they were to move today and buy equally priced home, they could see their mortgage payments double just for getting the exact same kind of home. So many people don't want to move because they don't want to have that added cost.

The only people we are seeing move right now are those who are downsizing, moving to more affordable areas, or people who have a major life situation happening, like a marriage, a divorce, or a new baby on the way.

Amna Nawaz:

We know we have long had an affordable housing shortage in this country that's gotten worse in recent years.

What have the last 16 months of rate hikes meant overall for housing supply?

Daryl Fairweather:

Well, the interest rates have had a very direct impact on the housing market, because people need to borrow money typically to buy a home.

Also, people who own homes typically have mortgages. And if they were to move again, they would have to face another mortgage at an even higher rate. So it has a very direct impact on people's willingness to both buy and sell homes. And these high interest rates are what's behind the slowness in the housing market and how few homes are being actually sold right now.

Amna Nawaz:

So, Daryl, mortgage rates are now at their highest level since 2002. Do you see them coming down anytime soon?

Daryl Fairweather:

I do think mortgage rates will fall whenever inflation falls. That's definitely been the major story in the economy this year, paying attention to inflation.

Once inflation looks like it is under control, I expect mortgage rates to fall, and I expect them to fall sharply and swiftly. And that could cause a whole lot of people to rush into the housing market to take advantage of those low rates.

Amna Nawaz:

And what about when you look ahead? We know there could be another interest rate hike ahead from the Fed. What would that mean for the housing market?

Daryl Fairweather:

The Fed is going to be paying attention to inflation.

So they will hike if inflation is persistent, but they will not hike and they could even potentially cut if inflation slows down and the economy slows down with it. So, I don't think there's anything set in stone. But the Fed is just going to pay attention to the new economic releases as they come out and make decisions based on that information.

Amna Nawaz:

All right, that is Daryl Fairweather, chief economist for the real estate company Redfin.

Daryl, thank you so much. Appreciate your time.

Daryl Fairweather:

Thank you.