By Utah Associate of Realtors
With mortgage interest rates moving to their highest levels since early 2019, many are wondering how the increase will affect Utah’s housing market.
Freddie Mac reported on Thursday that the 30-year fixed-rate mortgage jumped a quarter percent, averaging 4.42% for the week. That’s the highest weekly average since Jan. 31, 2019.
As the Federal Reserve takes actions to get inflation under control, borrowers can expect that their mortgages will cost more than they did a year ago. Here’s a look at how rising interest rates will
affect purchasing power, affordability and housing demand.
Purchasing power and affordability As mortgage rates rise, buyers will pay more to borrow money. Here’s an example of how a monthly mortgage payment changes as the interest rate increases. This assumes a 20% down payment:
• $400,000 mortgage at 3.5%: $2,079.51
• $400,000 mortgage at 4%: $2,192.99
• $400,000 mortgage at 4.5%: $2,310.97
• $400,000 mortgage at 5%: $2,430.62
As illustrated above, your interest rate can make a big difference in how much you pay each month.
According to the National Association of Home Builders and its 2022 Priced- Out Estimates report — which looks at affordability nationally — a household would need to make $99,204 to afford a home priced at $412,505. If interest rates rise to 5%, the family would need to make $113,768.
Looking more locally, Salt Lake City has a 146.9 affordability score, according to an affordability dashboard from the National Association of Realtors. Any score above 100 means a median-income family has enough income to qualify for a mortgage on a typical home.
Rising interest rates, however, could cut into that affordability. According to a report commissioned by the Utah Association of Realtors and written by Dejan Eskic, senior research fellow at the Kem C. Gardner Policy Institute, a rise in rates from 3.5% to 4.5% could price out an additional 5% of Utah households.
Housing demand
Even though demand may soften a bit because of the increase in rates, this could help Utah’s housing market, which has seen prices skyrocket in recent years. At the end of February, there was a record low number of homes for sale in Utah and competition was at a record high, according to Utah Association of Realtors data. A decline in demand could result in a deceleration of home prices — a welcome change after years of double-digit price growth. With that said, most experts don’t expect prices to fall because of the lingering housing shortage. In fact, Eskic expects Salt Lake home prices to increase 8.5% in 2022.
The long-term outlook for housing demand is also strong. That’s because Utah continues to face a housing shortage because of a decade of underbuilding combined with a large number of millennials reaching their early 30s and prime home-buying years. “Because they are the largest living generation, demand for both owner-occupied and rental housing will remain strong over the next five to 10 years as
millennials form households and start families,” Eskic wrote. “Nearly 25 million young adults are living with their parents and represent nearly one-third of all individuals between the ages of 18 and this group has tremendous sway over the future of the housing market.”
It’s also important to remember that the last few years have represented a period of record-low mortgage rates. While interest rates are rising now, 5% is still a low rate by historic standards. In the 2000s, rates were in the 5-7% range. In the 1990s, they were 6-10%. In the 1980s, they were 9-18%.
For more information about how to navigate rising interest rates and the current home-buying market, contact a local Realtor. A directory of Utah Realtors is available at UtahRealtors.com.