Mortgage rate increase, however slight, forces buyers to sidelines

Amy and Ted Wilder lost out in the bidding for several Seattle-area homes during the past six months, even with offers well above the asking price. After May’s sudden spike in mortgage rates, the Microsoft consultants put their search on hold.

"We fell in love with a house for about $400,000 and thought we could afford it, and then we discovered it was $300 more a month than what we would have paid in February when we started looking," Amy Wilder, 42, said. "The mortgage rates just pushed it too far."

A surge in borrowing costs to a two-year high is starting to cool demand from homebuyers as higher rates combine with surging prices to reduce affordability, according to data released this week. The biggest pinch is being felt in expensive markets such as Seattle and New York, where budgets already were stretched, leading to a more uneven national recovery.

Contracts to buy previously owned homes fell 1.3 percent last month, the biggest decline this year, the National Association of Realtors said last week. They slid 6.5 percent in the Northeast and 4.9 percent in the West, the data showed. The figures followed a report last week that July new-home sales plunged 13.4 percent, paced by a 16.1 percent drop in the West.

"There is a bigger monthly payment shock in the high-cost areas," said Lawrence Yun, chief economist for the Realtors group. "Higher interest rates may pull demand out."

Home-loan applications for purchases have declined 14 percent since the start of May when interest rates surged by the most in two decades, according to the Mortgage Bankers Association, and price appreciation has slowed, albeit from the fastest pace in seven years.

The average rate on a 30-year, fixed-rate purchase loan has risen to 4.51 percent from a record-low 3.31 percent in November, according to McLean, Va.-based Freddie Mac, as the Federal Reserve said it’s planning to wean the economy from its record stimulus.

That means on a $400,000 conventional mortgage, monthly payments would be about $275 more. Rates on jumbo mortgages, those too big for government programs, have climbed to 4.69 percent from 3.88 percent at the beginning of May.

Some jumbo borrowers have stepped back from the market or turned to adjustable-rate mortgages with payments that rise only after five years to keep payments low, according to Brian Koss, executive vice president of Mortgage Network Inc., a Danvers, Mass.-based lender that originates loans primarily in the Northeast.

"It means less transactions happening because more deals are not coming together," Koss said. "It slows everything down."

Among large metro areas, San Francisco is most at risk from climbing rates, followed by Los Angeles, New York and Boston, Barclays Plc analysts said in a report last month. The cities should still see home prices appreciate, the analysts led by Sandeep Bordia said.

With property values nationwide increasing in May at the fastest pace since 2006, a slowdown in the housing market is needed after unsustainable price gains in many areas, Stan Humphries, chief economist at property-data company Zillow Inc., said yesterday on Bloomberg Television.

The median price for homes in the Northeast is $271,200 and for the West $287,500, compared with the national median of $213,500.

Home prices across the U.S. rose 12.1 percent in June from a year earlier, according to the S&P/Case-Shiller index of 20 cities, with values in San Francisco up 24.5 percent in the period. Prices in Seattle gained 11.9 percent, Boston showed a 6.7 percent increase and New York area values were up 3.3 percent, the smallest gain in the index. Still, only six cities showed prices rising faster than the previous month, compared to 10 in May.

Higher rates take the "edge off the froth," said Jonathan Miller, president of New York-based appraiser Miller Samuel Inc. "You can’t sustain annual price growth in excess of 12 percent when income is flat, credit is tight and unemployment is elevated," he said. "Those are boom price trends."

There’s already been some impact, according to Ellen Haberle, real estate economist for Redfin, a Seattle-based brokerage.

"A lot of agents are reporting that buyers were in escrow on a home and then rates went up and they no longer were able to afford the home," she said.

Peter McMahon, a Redfin broker in Long Island, N.Y., said many clients stepped back from the market after rates increased "and are planning to buy in the fall when there is less competition."

For John and Tess Vlastelicia, higher borrowing costs hurt their chance to buy a new house for their growing family in the Happy Valley suburban near Portland, Ore., where prices in June had already jumped 11.8 percent from a year earlier.

They tried to back out of a contract to purchase a four- bedroom property two months ago, after rising mortgage rates added $190 to their monthly payment, according to John Vlastelicia, 36, an environmental scientist.

He said the builder, who kept them in the deal by offering them $5,000 towards closing costs, now plans to walk away unless the family can sell their current home by Friday, after it’s lingered on the Portland market since June, listed at $269,900, less than they paid five years ago.

"We were caught in a situation where our timing was just terrible," he said. The higher rates threatened "both sides of our deal."

A slowdown in the housing recovery has dented homebuilder stocks, which have lost 27 percent since their May high compared with a less than 1 percent loss in the Standard & Poor’s 500 Index. Builders catering to first time buyers have been among the hardest hit with D.R. Horton Inc. down 33 percent and KB Home sliding 34 percent.

It’s also encouraged more Americans to lock in rates before they head even higher, with existing sales last month jumping in July to the second-highest level in more than six years.

In markets like Seattle, where the Wilders were seeking to buy, rising rates coupled with soaring prices have put homeownership back out of reach. For now, they’re renting a 1,800-square-foot house for $1,900 a month.

"We came into the market when we were ready, but it turned out we just missed the good deals," Amy Wilder said. "If prices soften a little bit and interest rates level out, maybe we can try again."