4-Apr-21 – Home loan interest rates have inched up about half of one percentage point since the beginning of 2021, and analysts say that rise is beginning to squeeze young buyers out of the market.

On April 1, benchmark 30-year fixed mortgage rates averaged 3.18 percent nationwide, up from 3.17 percent a week earlier, reported Freddie Mac’s Primary Mortgage Market Survey.

What is more important, rates have risen 0.53 percent – more than half a percentage point – since setting a modern-day record low of 2.65 percent on January 7, 2021. The rock bottom 2.65 percent benchmark is the lowest rate in the Freddie Mac survey’s history that dates back to 1971. A year ago, lenders were charging an average of 3.33 percent for 30-year fixed loans.

“Although mortgage rates remain low, we are beginning to see a pullback by those looking to enter the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Home buyer demand has gone from 25 percent above pre-COVID levels at the start of the year, when mortgage rates hit record lows, to 8 percent above pre-COVID levels today.”

Khater noted that purchase demand is diminished today as compared with late May and early June of 2020, when mortgage rates were the same level.

“This is confirmation that while purchase demand remains strong, the marginal buyer is feeling the affordability squeeze resulting from the increases in mortgage rates and home prices we’ve experienced in recent months,” said Khater (left).

The Freddie Mac survey is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20 percent down and have excellent credit.

In 2020, mortgage interest rates set new record lows an amazing 16 times, and thousands of first-time home buyers moved across the threshold into new and existing housing. However, the party may be over for a while.

Analysts said long-term mortgage rates are creeping higher because of rising interest rates on 10-year Treasury notes, which have recently skyrocketed to 1.74 percent from a shockingly low 0.54 percent during the depths of the pandemic.

Optimism about future economic growth, success of the COVID-19 vaccine, and worries about a rise in inflation after the federal government pumped another $1.9 trillion in stimulus funds into the economy also are pushing bond rates higher, experts say.

Light at end of tunnel?

Despite the upward creep in home loan rates, and a shortage of listings, housing experts say there is light at the end of the tunnel.

John Chang, Senior Vice President of Marcus & Millichap, noted that home sales have surged nationwide in recent months, with sales activity in February coming in 9.1 percent higher than in February 2020.

Meanwhile, home prices skyrocketed 16.2 percent year-over-year nationwide to a median price of $334,500, a record high. Chang said sales activity would likely be even greater, but the number of homes for sale on the market has dropped to a record low.

Typically, new-home construction ramps up to meet demand, said Chang (right), but new-home starts tapered last month to about one million units, a figure that represents 55 percent of construction levels during the housing boom of 2006.

Slower housing starts are probably the result of harsh weather conditions in February, and rising material costs, which Marcus & Millichap pegs at 11.4 percent higher than last year. Builders report that rising lumber costs have added $24,000 to the cost of the average new home.

According to Chang, the biggest driver of first-time home sales is the “aging millennial generation.” There are currently 45 million people between the ages of 30 and 40 years in the United States. That’s three million more than five years ago.

The median age of first-time home buyers is 33 years, and over the next five years the number of people in that age group is expected to climb by another two million, forecasts Marcus & Millichap, which is predicting 2.5 million more households being formed each year in 2021 and 2022.