Road to homeownership gets rockier this spring as rates rise

Chad Zolman and son Quinten, 5, stand on the lot where their home will be built in Castle Rock, Colo. Rising interest rates are causing some buyers to move farther away from major cities. Chad Zolman and son Quinten, 5, stand on the lot where their home will be built in Castle Rock, Colo. Rising interest rates are causing some buyers to move farther away from major cities. Photo: David Zalubowski / Associated Press Photo: David Zalubowski / Associated Press Image 1 of / 4 Caption Close Road to homeownership gets rockier this spring as rates rise 1 / 4 Back to Gallery

Higher mortgage rates are making the already challenging task of buying an affordable home even tougher for many Americans this spring.

In metro areas such as Denver, buyers are rushing to close a deal before mortgage rates get too high. In Dallas, some are embracing longer commutes to find homes they can afford. And in places such as Los Angeles, where the number of homes for sale is down sharply from a year ago, sellers routinely receive multiple offers.

The average weekly rate on a 30-year fixed-rate mortgage edged up to 4.47 percent last week. While still historically low, the rate was 3.95 percent at the start of this year. A half percentage point boosts monthly payments and can add tens of thousands of dollars extra in interest over the life of the typical 30-year loan.

The combination of low inventory, rising prices and higher mortgage rates is expected to weigh on the U.S. housing market this year, with several economists and housing experts forecasting U.S. home sales will be flat or only slightly higher than in 2017.

MBA BY THE BAY: See how an MBA could change your life with SFGATE's interactive directory of Bay Area programs.

Danielle Hale, chief economist for Realtor.com, said “for home shoppers this spring it’s going to be the most competitive market we’ve seen in the last few years.”

Chad Zolman, an account manager, made 11 offers since his search for a home in Denver began in September. He lost out to rivals offering more money. As mortgage rates started rising, so did Zolman’s anxiety.

“The rates kept going up, and the more the rates kept going up, the less house you can buy,” said Zolman, 41.

Zolman eventually bought a three-bedroom townhome under construction for $370,000. He got approved for a 30-year fixed-rate loan just under 4.7 percent. But he can’t lock in his rate until mid-May, within the 120-day window before construction on the house is completed.

And if rates go higher by then?

“It is what it is,” Zolman said. “You just have to pay it.”

For others, rising mortgage rates make it tougher to bridge the widening gap between home prices and incomes.

Consider that the national median home price is $225,264 (less than one-third of what it is in the Bay Area). That works out to 3.8 times the U.S. median income of $59,039, according to the most recent annual income figures from the U.S. Census and home price data from real estate information company Attom Data Solutions. The price-to-income ratio was 3.3 back in 2000.

In Los Angeles a median-priced home is $605,000, more than nine times the metropolitan area’s median income of $65,950. Rising housing prices have widened the home price-income gap to five times or more in Seattle, Denver, Portland, Ore., Reno and some other cities.

Buyers are in better shape in Pittsburgh, St. Louis, Oklahoma City, Indianapolis, Baltimore and other cities where the median home price is less than three times the median income.

Overall, home prices are 6.3 percent higher than their peak in July 2006.

“The reason prices are rising is that balance between supply and demand: Plentiful demand; not enough inventory,” said Hale of Realtor.com.

The supply of homes for sale fell 8.1 percent in February from a year earlier to 1.59 million. It would take just 3.4 months to snap up the supply of available homes at the current sales rate, down from an average of 6 months since 2000.

Meanwhile, a strong job market has helped boost confidence among many Americans that it’s a good time to buy a home. Millennials are reaching peak home-buyer age, adding to the crop of would-be buyers this spring.

Many current homeowners who locked in historically low rates in recent years may be reluctant to sell if it means taking on a higher mortgage rate on their next home. That could further diminish the inventory of homes for sale nationwide.

Home sales have been uneven so far this year. Sales of existing homes rose 3 percent in February after falling in December and January, according to the National Association of Realtors.

First-time buyers Rob Chilton, 33, and his wife were willing to endure longer commutes to find a house near Dallas. They bought a three-bedroom, two-bath fixer-upper for $335,000 in February. That’s $15,000 below the asking price, but $45,000 more than what the couple felt they could comfortably afford.

“Houses that used to be comfortably in our price range three or four years ago are now out of our price range,” said Chilton, a music teacher. “By moving a little further North, we could get a newer home in a little bit better condition in our price range.”

In Dallas, as in many other markets this spring, it’s common for sellers to receive multiple offers above their asking price. A home that hit the market recently for $215,000 drew no shortage of buyers, said James Williams, broker associate at Berkshire Hathaway HomeServices PenFed Realty.

“In the first weekend we had 40 showings, 10 offers with the highest offer being $15,000, or 7 percent, over the list price,” Williams said. “There’s definitely a shortage of inventory under $300,000, and when those homes do come on the market it’s a frenzy.”

Alex Veiga is an Associated Press writer.