Has It Become Much Harder To Take Out A Mortgage?

The American housing market has always been a tough one to follow for the novice. We hear all about the various booms and crashes, with conflicting understandings of what happened. We hear about current prices, past and future prices, and have to make sense of all of that information if we are to make good choices. It’s no wonder that young people are struggling to even begin thinking about homeownership.

If you’re hoping that it’s gotten easier to get a grip on the housing market, you are in for some disappointment. No one seems to have any real idea of what is next for property in America. At the start of the pandemic, people had a grim view of what would happen to prices, and yet things have gone very differently.

Prices have risen continuously for two years at a steep rate. Low supply was a big driver, but the responsibility was placed largely at the feet of mortgage rates. As a new homeowner, you may not understand everything you need to know about mortgage rates. To help you grasp why taking out a mortgage has suddenly become so difficult, here are the basics.

Pandemic Interest Rates

At the start of the pandemic, as the economy crashed due to lockdowns, the Federal Reserve lowered interest rates to stimulate economic growth. This had the knock-on effect of lenders being able to offer extremely low rates on mortgages. These low rates significantly impacted what people could afford.

It may be difficult to see this when looking only at the full price of a home. A bigger number naturally leads many to assume that the home will be more expensive. But if you are paying it off over twenty to thirty years, it is your monthly payments that are more significant. With record low mortgage rates, people were able to buy more expensive homes while paying less than they would have on a cheaper home months earlier.

Demand rose and prices shot up, so that it was becoming harder to buy a home even at a low mortgage rate. This continued until 2022, when we started to feel the effects of inflation.

Inflation and Interest Rates

One of the side effects of low interest rates was high inflation. By the end of 2022, inflation was already steep and only getting worse. In order to correct this, the Fed knew that they would have to raise interest rates. Which is what they have gradually been doing.

This started off fairly slowly, with rates rising incrementally. However, various world events caused inflation to continue rising, and the Fed has raised interest rates far more aggressively. Now, in June, this has led to mortgage rates that are higher than pre-pandemic levels.

What does this mean for you if you want to get a mortgage?

Expensive Housing, High Rates

With this scenario, we are now in a place where what you will actually pay for a house can be better compared to pre-pandemic figures. And, in most parts of the US, the average house will cost you at least tens of thousands more. In terms of monthly payments, that amounts to hundreds of dollars more every single month.

In other words, if you were struggling to afford a mortgage in early 2020, you will find it impossible in 2022. That’s for now, at least.

What is still unknown is what will happen to the housing market. It is due for a correction. The high prices and high rates necessarily lead to lower demand, and we are starting to see prices plateauing, if not dropping just yet.

The question is whether the housing market will cool or crash. If it is the former, houses will remain more expensive than many potential homeowners can afford. If it is the latter, buying a home in a crashing market may be too irresponsible a decision to make.

Getting a mortgage in mid-2022 is much harder than it has been for years. Whether that will change remains to be seen. For now, it appears unlikely that those struggling to afford a mortgage will be able to do so any time soon.

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