Rising rates, prices panic would-be homeowners

Call them white-knuckle buyers -- shoppers worried that their chance to own an affordable home is rapidly fading. Real estate agents weigh in with their thoughts.

By Marilyn Lewis Jul 8, 2013 11:20AM

Miniature home on sheet of percent signs © Comstock/Getty ImagesCelia Borrayo had hoped to stay in Goodyear, Ariz., where she, her husband and their three youngest children rent a home. Just a couple of weeks ago, that seemed like a realistic plan for these first-time homebuyers.

 

But then interest rates suddenly spiked. In just one week, from June 20 to 27, the average rate for a 30-year fixed-rate mortgage grew faster than at any time since 1987, from 3.93% to 4.46%. Before that, rates had stayed below 4% since November 2011.

 

Rates have fallen back a bit since, but so far only a smidgeon. This week, the average rate on a 30-year fixed rate has dropped slightly, to 4.385%, according to MSN Money (see bottom of page.)

 

Caught by surprise, homebuyers are reeling. All of the sudden, they're getting considerably less for their money. The response, for many, is panic, say two real estate agents in Arizona and Massachusetts. Applications to refinance "tumbled," according to Capital Economics, but the demand for financing from homebuyers is unchanged.

 

Changing expectations

The Borrayos had been looking for a four-bedroom, two-bath home in Goodyear, 18 miles west of Phoenix. They were hoping for one with a big lot and an RV gate -- an enclosed space for extra parking. Now, that prospect has receded from their grasp.

 

Instead, they've begun shopping for a three-bedroom two-bath home, and in Buckeye, 15 miles west of Goodyear,  longer commute from Phoenix and their landscaping jobs.

 

"With rates going up from 3.75% to 4.5%, the same buyer who would quality for $140,000 now will qualify for a mortgage in the $125,000 to $130,000 range," says their real-estate agent, Veronica Barragan, at Sueno Realty Group in Avondale, a western Phoenix suburb.

 

In fact, it is no longer certain that the Borrayo family will be able to buy a home at all. Like many home shoppers around the country, they've been hit with a double whammy: Not only have rates risen but home prices are going crazy.

 

Nationally, home prices rose 12.2% from May 2012 to May 2013, says a new report from CoreLogic. Almost every U.S. market now is participating in the recovery, with prices up in 97 of the top 100 largest metros.

 

In Arizona, where Celia Borrayo is shopping, prices rose nearly 17%. Last year, she might have found a home for $140,000 to $180,000 in Goodyear, her agent says. Now, that's unlikely, as anxious home shoppers compete with investors, all of them trying to outbid each other in their eagerness to get into the market.

 

The market has bottomed

"People now realize that they've seen the bottom," says Lynn Cohen, CEO of the Keller WIlliams Realty franchise in Newton, Mass. In upscale Newton, where the average home costs $600,000, prices have increased 8% to 10% just since summer began, she estimates.

 

Buyers are panicking, Cohen says. "People are trying very desperately to get into a property before they are priced out."

 

Usually, agents joke that Cape Cod might sink each summer when it seems that all of Boston has gone there to the beach. This summer, though, buying has been intensifying.

 

"There is that very intense feeling that they have to hurry, that they may be too late. Each deal is painful because they feel they're spending more than they can," says Cohen.

 

Anguished buyers who were prequalified to borrow one amount find that, by the time they locate a home, their purchasing power has shrunk. To keep up with the competition, they're forced to add cash to their offers. If they have it.

Dropping out

The alternative is to drop out. In Arizona, the combination of high prices and rates is "taking most of the buyers out of the game," says Barragan. She is president of the National Association of Hispanic Real Estate Professionals' Arizona chapter.

 

In a phone interview, with Barragan translating from Spanish, Celia Borrayo wonders if she should quit trying to buy. "Now, maybe I should give up and not buy," she says.

In Boston, Cohen says, the overheated atmosphere is making real-estate professionals nervous. Her agents are advising some buyers to pull back and wait.


Two of her clients, a young pregnant Boston couple who are chafing to leave their rented studio apartment before their twins are born, are adjusting to the rising costs by moving their search searching into the suburbs, as the Borrayos are doing in Phoenix.

 

"They will find a house," Cohen says of the pregnant clients. "There are communities that are not as wild as ours. The farther west you go the better you can do."

 

She and her colleagues worry that current prices are unsustainable, and that they could collapse in a repeat of the 2006-2012 housing crash.

 

"We are shaking our heads at what people are willing to step up and pay for a property right now," she says. "We're only afraid that they're going to come to us in a year and tell us to sell it and we can't get their money back."

 

More at MSN Money

 

VIDEO ON MSN MONEY

139Comments
Jul 8, 2013 12:39PM
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Panic! What a bunch of idiots. They need to look at history and get a dose of reality. If that increase is enough to scare them away from buying, then they can't afford the house.
Jul 8, 2013 12:29PM
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If your buying at the peak of what you qualified for, your over spending anyway. Just buy what you can truly afford and don't get suckered in on those ARM loans. Rates under 5% are still excellent, I was at 8% when I bought my first home, consider yourselves lucky.
Jul 8, 2013 1:05PM
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Are you joking? I paid much higher interest rates than that 30 years ago. The panic is pure bull. There is always a house and always a deal. It takes patience. Here we go with another big con job that your going to miss out in this' roaring' economy.
Jul 8, 2013 12:44PM
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Let me get this straight... we "claimed" free enterprise brokers and lenders were crooked and let the banks destroy them in 1999. We witnessed total corruption by banks for the next 7 years until BANKS caused the greatest financial collapse of asset validation in history. We've endured artificial recovery from the Federal Reserve through banks since then and banks as a monopoly for home mortgages. Millions of actually qualified lenders have been blockaded from their industry by dumb alumni sharks with finance degrees AND, in spite of all the corruption every person in America can bear witness to, we are STILL making mortgages to people who have one foot in the Bankruptcy Court and the other- at the Closing Table? Isn't it time to close the banks, end the Federal Reserve and get RID of Wall Street?
Jul 8, 2013 1:22PM
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Oh No, rates might go over 4%, the sky is falling, batten down the hatches, call 9-1-1 and prepare for the end of the world!

Talk about a distortion of reality - how did we ever get to this point?  Incrementalism is a powerful tool.

Jul 8, 2013 2:08PM
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My first house in 1987 was 11.4 % ..... get a grip the rates are still very low !!!
Jul 8, 2013 1:06PM
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What person with an IQ over 10 would listen to these scumbag con artists, Realtors?
Jul 8, 2013 11:49AM
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This has to be a comic book...........
Jul 8, 2013 1:23PM
Jul 8, 2013 1:21PM
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When I got out of the Air Force in 1973 and returned home I bought my first house and the interest

rate was 4.75%. In 1976 when my wire became pregnant and we needed a bigger house the rate

was at 5.25% . People today don't have a clue about rates and what they can or cannot afford

and locking in low rates for the next 30 years////////////////////

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Give me a break -- panic, really?  My first home loan was 10.62% (late 80's).  I was a loan officer when second mortgages were 16 - 18% (thank you Pres Carter).  It really is a buyer's & borrower's market.  Make a solid choice, don't borrow the max the real estate loan officer will qualify you for, and enjoy your new home. 
Jul 8, 2013 2:59PM
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Some of you are missing the point of the article.  Yeah we all know that house prices are still low and around where they were in 2003 - before the spike up in 2004, 2005 and peaking in 2006.  And we all know that rates are still extraordinary low in historical terms.  But the point is that this recent rapid spike in rates just knocked out thousands of deals that were borderline.  My friends in the home inspection business tell me that their phones went quiet right after the rate rise.  This will have a ripple effect and slow down the growth in GDP for the 3rd and 4th quarters - unless rates fall back (as they are today!)  It's the up and down gyrations that's killing us - but the Wall Street Whores keep manipulating stocks, bonds, oil, etc and make money on the way up AND ON THE WAY DOWN!  They don't make money unless there is movement - and just small moves can make them a fortune!
Jul 8, 2013 3:05PM
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when I bought my first home, the interest rate was over 8% - however, my home was purchased for $55,000.  It was a beautiful, well maintained 3 bedroom 2 bath brick home on a cul de sac, in a nice neighborhood.  The interest rate isn't the problem, it's the price of the homes.  If I found a home for that price now, it would probably need many thousands of dollars of repairs. Sadly, right now, peoples incomes aren't much more than they were 20 years ago - but with inflation and the ridiculous price of fuel, folks can not afford for the home prices to be where they are AND pay that kind of interest.
Jul 8, 2013 12:31PM
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Oh $hit !!!
What am I gonna do now ???

Jul 8, 2013 12:40PM
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Gen X Y & Z are not buying this load of C*ap ...This kind of scare tactic probably worked in the 70's & 80's on Mom's & Pop's but today's 20 - 30 somethings are not about to become your debt slave because you threaten them with a % rise in interest. 

You need a new pitch...
Jul 8, 2013 1:12PM
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ALERT: DEAD CAT BOUNCE IN PROGRESS:

 

"Dead Cat Bounce". Folks are still without "Good Jobs", if they have one at all, look around at the dead lawns and clearly vacant houses in your neighborhood. I have seen the signs in every town I have been in over the last 5 years. The reports of the new permanent under class of: the unemployed, people who lost jobs and the newly student loan enslaved, who may never get jobs, are visible all around us. The banks are only trying to sell off the inventory they have already foreclosed on and have been delaying default filings against those who stopped paying years ago. More home sales for the "PMI" insurance payouts, just like the last run up in prices, the banks all knew the loans were going to go bad, it was all about getting the PMI payouts on the defaults.

Jul 8, 2013 1:28PM
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Oh yea I forgot those 195,000 part time server jobs came on line last week. Yup these real Estate Experts have such a lovely track record of calling straight shots. There will be no housing recovery so give us a break.  Oh yea lets blame the FED, not the completely destructive trade policies pushing thousands of Americans off the middle income ledge every week.  We need to build consumers at this point.  You get it?,  folks don't have the incomes to participate yet even withstand another housing bubble.  I bet there isn't  one real estate salesman somewhere who can squeeze blood out of a turnip and now he must go through hundreds to try and find that special cherry.  Clearly 1/3 are cash buys for investments at this time. Amazing how many sales folks as well as an entire Industry that doesn't understand the expression.  "We can't afford it".
Jul 8, 2013 1:43PM
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"..Low interest rates is a key factor in making homes affordable..."

A-ha-ha-ha-ha, what a bunch of clowns? Low interest rates actually hurt housing because low interest rates create bubbles. What do you think is better, to buy at lower price with higher interest rates or at higher prices with lower interest?

When you buy with with low interest rates at higher price you have less equity in your house. and guess what happens when interest goes up, that's right, the home prices go down.

Jul 8, 2013 2:22PM
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When rates go up, where do prices go? Down. Proceed with caution.
Jul 8, 2013 3:40PM
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People need to "live within their means" and quit living at their max debt/income ratio.
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