Warning: Buyers’ ‘Financial Comfort Zone’ is Shrinking

With mortgage interest rates and monthly mortgage payments both rising as we start 2022, homebuyers’ “financial comfort zone” will likely continue shrinking in the New Year. According to ATTOM Data Solutions chief product officer Todd Teta, “The average wage earner can still afford the typical home across the United States, but … the portion of wages required for major ownership expenses nationwide is getting closer to levels where banks become less likely to offer home loans.” Teta said ATTOM Data will keep watching this metric due to “the pandemic again threatening the economy.”

While it might not feel like the average wage earner can afford a “typical home” in many markets where real estate investors are active, the data indicates that low mortgage rates and rising wages are keeping most homes in range for would-be homebuyers. However, that “low mortgage rate” factor could change quickly since interest rates must remain around 3 percent or lower for this to work. With housing inventories getting tighter and tighter while interest rates rise, soon the realm of affordability could be out of sight for buyers. The first week in January 2022, 30-year fixed-rate mortgage rates were just over 3.7 percent, while a 15-year fixed-rate mortgage was 2.6 percent.

At the end of 2021, the Fed announced it would likely raise funds rates three times in 2022, motivating many buyers to rush into the market and bid on homes aggressively in order to “lock in” low rates. Most industry experts predict that 30-year rates could be in the “low 4 percent range” by the end of 2022. This rate is still historically low, but much higher than many buyers are used to considering. This will affect homeowners with variable mortgage rates as well and will likely produce some softening in many markets, although it is unlikely to cause an actual crash.

Rick Sharga, executive vice president at RealtyTrac, noted investors should watch inflation as well. “The biggest question is whether today’s high inflation is transitory, as the Biden administration claims, or will be more pervasive,” he explained in an interview with The Mortgage Reports. “Higher inflation almost always results in higher mortgage rates.”

CoreLogic deputy chief economist Selma Hepp agreed, adding, “Inflation, government intervention in the housing market, the supply of homes for sale, and consumer debt will all play a part. Further gradual increases in the mortgage rates will be driven by the broadening of inflation and inflationary expectations as well as the continued supply shortages of labor, materials, and energy.”

What will this mean for real estate investors? Well, owners of hot commodities like single-family rentals and short-term vacation rentals are likely to benefit from more buyers postponing their purchases in favor of renting in desirable locations. 2022 – early 2022 specifically – is the year to acquire rentals!