Skyrocketing inflation is raising mortgages, putting first homes out of reach

Story at a glance

• The Consumer Price Index released from the Labor Department Thursday found that inflation increased in September by 0.4 percent and 8.2 percent over the past 12 months.

• The latest report will most likely result in added pressure on the Federal Reserve to hike interest rates once more, and its trickle-down effect could lead to higher mortgage rates.

• These heightened costs, along with the prospect of a weakening economy, are adding pressure on both lenders and buyers.

A new report showing inflation rising again in September is just the latest bad news for new homebuyers, who are increasingly seeing the cost of a first home pushed out of their reach.

The latest news puts lenders, already on edge amid a grim economic outlook, on high alert as they look to further cut costs and avoid mortgages that might end up in delinquency.

As a result, buyers are going to find it increasingly difficult to obtain a loan that enables them to purchase a quality home amid sky-high prices and mortgage rates.

Buying a home in January 2021 required roughly 19 percent of the median household income to afford the average home, Andy Walden, vice president of enterprise research at the data analytics company Black Knight told The Hill.

“Today, with 30-year rates nearing 7 percent, it requires 39 percent —more than twice the share —of that same median household’s income to make the mortgage payment on that same average home purchase,” Walden said in an email. “That’s simply made it unaffordable for many potential buyers, significantly shrinking the pool of potential buyers in the market.”

The Consumer Price Index released from the Labor Department Thursday found that inflation increased in September by 0.4 percent and 8.2 percent over the past 12 months.

The latest report will most likely result in added pressure on the Federal Reserve to hike interest rates once more, and its trickle-down effect could lead to higher mortgage rates.

Rates are already at a 16-year high, with the average 30-year fixed mortgage rate jumping to nearly 7 percent last week, more than doubling the rate from a year ago, according to data from the Mortgage Bankers Association (MBA).

The Federal Reserve’s battle with inflation resulted in several big rate hikes over the summer, which had already cooled the housing market substantially after a two-year pandemic-fueled boom.

Mortgage credit availability fell for the seventh consecutive month to its lowest point since 2013 last month. A decline in the index means credit standards are tightening, while an increase would indicate loosening credit.

“With the likelihood of a weakening economy, which would lead to an increase in delinquencies, there was a smaller appetite for lower credit score and high LTV [loan-to-value] loan programs, along with a reduction in government streamline refinance programs,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a statement earlier this week.

Rising interest rates have also led to a decline in applications for both new mortgage and refinancing options. Mortgage applications decreased by 2 percent from the previous week, according to data released Wednesday by MBA. Applications fell by 39 percent from the same point last year.

Although the Fed’s rate hikes have actually brought home prices down in recent weeks, the average home value is up by nearly 15 percent from a year earlier at $357,810, according to the real estate company Zillow.

And lower prices won’t help first-time home buyers all that much when their monthly mortgage rate is jumping higher.

The total monthly cost for a 30-year fixed rate mortgage at 6.81 percent would be about $2,400 if the buyer can secure a down payment of $71,562, according to Zillow’s mortgage calculator.

These heightened costs, along with the prospect of a weakening economy, are adding pressure on both lenders and buyers.

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Typically, lenders evaluate an applicant’s three Cs, Jason Sharon, owner and broker at Home Loans Inc, told The Hill.

These stand for capacity, character and collateral, or if the person has the income to withstand the new debt, has a sufficient credit score and if the property the buyer is aiming to purchase is worth what they are looking to borrow.

Sharon said the biggest stressor in the current market is a buyer’s capacity to carry the new debt. Interest rates and home prices have made monthly payments so high that even a borrower who would qualify for a home loan under normal economic circumstances could now exceed the allowed monthly debt-to-income ratio.

“The stress in today’s market is ‘monthly payment,’ which is part of the debt-to-income ratio. With the recent jump in rates combined with the 2-year run on housing price increases, many people have been priced out of the market completely or what they now qualify for does not meet their needs [or] desires,” Sharon said in an email.

Ira Rheingold, executive director at the National Association of Consumer Advocates, generally agreed with Sharon, although he said he has not seen a tightening in lending standards.

“I think it’s simply houses are too expensive. People don’t have enough money saved. Interest rates have gone up,” Rheingold said.

“And so, I think that’s why there are less mortgages being made. Not that it’s tougher for an individual to get a mortgage. It’s tougher for an individual to get a mortgage that will allow them to buy the house that they want to buy,” Rheingold added.

If there is a recession — something that is an increasing worry for policymakers and business leaders — it could leave lenders steering clear of riskier loans.

Banks do not want to give out loans to people who can’t pay them back.

“Every major recession has a leading indicator of a rise in unemployment. Usually unemployment is very low, then has a turn for the worse. Obviously, if you can’t get a new job, you can’t pay your mortgage,” Sharon continued.

A further weakened economy might lead to a rise in the number of home loans that are denied. Data from the Consumer Financial Protection Bureau shows the overall denial rate for home purchase applications in 2021 was 8.3 percent, falling by 1 percentage point from a year earlier.

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