Two years after enduring the devastating financial impacts of Covid-19, the U.S. economy has made an impressive comeback, in large part due to a booming housing market. But as Lawrence Yun, chief economist for the National Association of Realtors explains, there are significant questions regarding the sector’s direction over the coming months.

“Housing kept the economy afloat as home prices rose and buyer demand intensified,” said Yun. “However, this year has already thrown some curveballs, including record-low inventory and unyielding inflation.”

While housing supply appears to be on the upswing as builders increasingly construct new homes, Yun expects inflation to persist and in turn cause strain for would-be buyers. Additionally, other external economic factors will negatively impact the market, both indirectly and directly.

From soaring food prices to record gas costs, Yun said the Russia-Ukraine war has contributed to further housing unaffordability for buyers. He said that a more immediate impact for home seekers has been the rapid increase of mortgage rates, along with other anti-inflationary actions from the Federal Reserve.

“Mortgages now compared to just a few months ago are costing more money for home buyers,” he said. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”

NAR calculates purchasing a home is now 55% more expensive than a year ago. Rising mortgage rates and prices hurt affordability, and although wages are improving, Yun says they are “wiped away” due to inflation.

“Wages have risen by 6% from one year ago, and that’s good news,” said Yun. “But inflation is at 8.5%.” He estimates inflation will remain elevated for the next several months and that the market will see further monetary policy tightening through a series of rate hikes.

Citing a five-month decline in pending home sales, as well as a drop in newly constructed single-family sales, Yun predicts the higher mortgage rates will slow the housing market.

“The record-low rates of 2021 are gone, with rates above 5% becoming standard,” said Jacob Channel, senior economic analyst for LendingTree. “While a lower rate can make paying off a mortgage more affordable, it can be difficult to picture how much a higher rate can impact payments for new buyers.”

With that in mind, the online loan marketplace used data from LendingTree users to put a dollar amount on how rising rates can affect the cost of a mortgage.

“Specifically, we calculated the difference between average monthly mortgage payments on 30-year, fixed-rate loans in each state based on average APRs in January and April 2022,” said Channel. “We found rising APRs could potentially cost new borrowers across the U.S. hundreds of dollars a month — or more than $100,000 over the lifetime of the loans.”

• 30-year, fixed-rate mortgage APRs have increased by an average of 1.46 percentage points across all 50 states since January. In January, the average APR across the 50 states was 3.79%. In April, it was 5.25%.
• Nationwide, rising APRs are causing new mortgage payments to increase by an average of $258.57 a month. To put that figure into perspective, that monthly increase amounts to an average of $3,102.82 in extra costs each year and an average of $93,084.60 in extra costs over the lifetime of a 30-year loan.
• Mortgage payments increased the least in Ohio, West Virginia and Kentucky. Owing to relatively low loan amounts, monthly payments increased by $199.55, $200.81 and $202.28, respectively. Though these increases are less than the national average, they add up to an average of $72,316.72 in extra costs over the 30-year lifetime of a mortgage.
• California, Washington and Massachusetts are the states that saw mortgage payments increase the most. These high-cost states saw monthly increases of $406.78, $357.38 and $337.23, respectively. Over 30 years, these extra monthly costs add up to an average of $132,167.83.

Channel said that while rising rates won’t hurt most borrowers who currently have a fixed-rate mortgage and aren’t planning on selling, they could affect those who haven’t yet bought a home. For example, if APRs were to rise by another 50 basis points by year’s end, monthly mortgage payments across the country would increase by an average of $93.99, even if loan amounts stayed the same. This extra cost could make it even more difficult for some would-be home buyers to navigate what will probably remain a pricey housing market.

“Of course, there’s no guarantee that rates will rise that high by the time 2023 arrives,” said Channel. “And even if they did, it wouldn’t necessarily be all bad news. After all, higher rates should result in less demand from home buyers, which could, if nothing else, mean that those who decide to buy won’t be as likely to deal with hassles like incredibly tough home price negotiations and extremely limited housing inventory.”

“Regardless of what the future holds, it’s clear that rising rates have already made buying a home more expensive,” he noted. “Fortunately, that doesn’t mean home buying is an impossible feat, and with proper planning, purchasing a house could still be a great option for many people.

Tips for getting a lower mortgage rate

Though rates are quickly rising, there are still a few ways for borrowers to potentially get a lower APR on their mortgage.

• Shop around for a mortgage before buying. Because different lenders will often offer different rates to the same borrowers, home buyers can potentially secure a lower rate by shopping around for a mortgage before buying a house. In some instances, a borrower may be able to receive a rate that is dozens of basis points lower than what the first lender they saw offered them. This lower rate could result in tens of thousands of dollars in savings over the lifetime of a loan.
• Work on your credit. Because it’s used to gauge how likely a person is to repay their debt, a credit score is an important factor that lenders consider when determining what rate to offer a prospective home buyer. Because of this, borrowers should work on improving their credit score before they apply for a mortgage. Not only can a higher score help a home buyer get a lower rate, but it can also help in getting approved for a loan in the first place.
• Consider a mortgage with a shorter term. Shorter-term loans often come with lower rates than their long-term counterparts. For example, borrowers with excellent credit can typically expect to receive a rate on a 15-year, fixed-rate mortgage that’s more than 50 basis points lower than what they can expect to receive on a 30-year, fixed mortgage. Though a shorter loan term will typically result in higher monthly payments, it will nonetheless result in less interest paid over the lifetime of a loan. This can be worth it for those who have extra cash and don’t mind a steeper housing payment.