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Texas A&M researchers say higher mortgage interest rates are hurting housing affordability

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Higher mortgage interest rates are hurting Texas housing affordability, which is affecting first-time homebuyers, according to Clare Losey, an assistant research economist at Texas Real Estate Research Center at Texas A&M University.

“A higher mortgage interest rate equates to a higher monthly mortgage payment because, all else being equal, the borrower is going to be spending more on the cost of mortgage capital, meaning they are going to be paying out more in interest,” she said Wednesday. “As the total monthly mortgage payment increases, the income that the borrower needs to make to qualify for that mortgage loan also increases. The effect that this has is that for the same priced home with a higher mortgage interest rate, the borrower actually needs to earn a higher income in order to be able to qualify for a mortgage loan.”

Losey said higher rates push out more households from the market for homeownership, because as the required income to qualify for a mortgage loan increases, fewer potential buyers are going to be able to qualify.

“The median home price for the Bryan-College Station [metropolitan area] in the second quarter of 2022 was $314,000. We are estimating for a repeat buyer, a buyer who already owns a home, and is looking to sell their current home and move into a different home, their required income to qualify for a mortgage loan is about $54,000,” she said. “That is not including the cost of property taxes and insurance, that is just mortgage principal interest.”

For a B-CS family looking to purchase a home for the first time, Losey said, their required income to qualify for the starter home price was about $220,000 in the second quarter of the year. That family would need to earn a required income of about $40,000, independent of property taxes and insurance, she said.

“Bryan-College Station and Texas still remains relatively affordable with respect to homeownership. The noticeable decline in affordability from the first quarter to the second quarter this year is largely precipitated by that increase in mortgage interest rates,” Losey said. “The rise in rates equated to about 3 percentage points from the first quarter to the second quarter, so that is a pretty significant increase in a mortgage interest rate. Overall B-CS is relatively well positioned with respect to its housing affordability.”

Losey said through research done by TRERC, a Bryan-College Station family earning the median income, actually makes 34% more than is necessary to qualify for a mortgage payment for a median priced home.

“In essence, the median family income in B-CS is more than sufficient to qualify for the median priced home,” she said. “Looking at the future, we know Texas has a strong economy and we are performing pretty well. However, we have this looming question of are we currently in a recession nationwide or will we be in a recession later this year or into 2023? That has yet to be answered.”

Losey said barring any sort of economic shock, like a recession, she anticipates that as the Federal Reserve tries to get ahold on inflation and achieve price stability, they are going to continue to increase federal fund rates, which is going to induce upward pressure on mortgage interest rates.

“As long as those rates are rising, we will probably see somewhat of a softening in the demand for homeownership,” she said. “So, that should help to moderate that price growth to help affordability.”

Harold Hunt, a TRERC research economist, said he agreed with Losey in that mortgage interest rates are at an uptick, however in the last two weeks they have slightly decreased.

“Recently, we have seen mortgage rates come down. We had a run up in June, but they have dropped,” he said. “But, the expectation is that as the Federal Reserve increases the fed funds rate, mortgage rates will go back up, we don’t know by how much. … The expectation is that they will go back up because the Fed continues to increase their interest rates to try and fight inflation.”

Jim Gaines, a TRERC research economist, said mortgage interest rates in the last six months have gone from about 3% interest to anywhere from 5.5-6% at one time.

“These interest rates change almost daily. For instance if your interest rate went from 3% to 6%, your monthly payment to borrow the same amount of money, went up perhaps hundreds of dollars per month depending on how much you were looking at,” he said. “Many people battled that putting them over the edge to where lenders would say ‘With your monthly income, you can’t afford that monthly mortgage, but you can afford this much, which is less.’ So now people had to either make it up with the down payment or buy a cheaper house.”

For a lot of people making between 50-90% of the area median income, which is somewhere around $53,000 a year, Gaines said they are most affected by the increased rates.

“Somebody making $45,000 a year, as a family or household, that is the type of buyer on the cliffs edge of qualifying for a mortgage and being able to buy a house they want to buy,” he said. “I don’t think we will see a 3% mortgage interest rate ever again.”

For more information regarding housing affordability, visit recenter.tamu.edu.

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