Mortgage payments are 'a huge sticker shock' for potential homebuyers

Record-high home prices are finally falling month over month, but the pullback hasn't been enough to bring back buyers — especially as mortgage rates remain high.

"The typical mortgage is up 77% year over year...That is a huge sticker shock for people going out and considering buying a home," Jeff Tucker, senior economist at Zillow, told Yahoo Finance Live (video above). "So it is keeping a lot of folks on the sidelines at the moment."

While the median listing price in November is down more than 7% to $416,000 from June’s high of $449,000, it's still 11% higher than a year ago, according to Realtor.com. At the same time, mortgage rates have jumped almost 2 percentage points from 5.09% at the beginning of June to as high as 7.08% in November, according to Freddie Mac.

Rates are now more than double where they were at the beginning of the year, with buyers of a median-priced home facing a $2,150 monthly mortgage payment. For a household earning the median income of $72,000, that represents 40.6% of their monthly salary.

“At the end of the day, this is being driven by affordability,” Tucker said. “There are a lot of interested buyers on the sidelines, but the combination of higher prices and higher mortgage rates is making that mortgage payment unaffordable for many people.”

Realtor Steve Bremis (L) talks to house hunters Makayla Gavitt (C) and David Harris during an open house at a condominium unit in Somerville, Massachusetts. (Credit: Brian Snyder, REUTERS)
Realtor Steve Bremis (L) talks to house hunters Makayla Gavitt (C) and David Harris during an open house at a condominium unit in Somerville, Massachusetts. (Credit: Brian Snyder, REUTERS)

Elevated home prices and mortgage rates have stunted homebuyer demand, according to the Mortgage Bankers Association’s latest survey of applications, as inflationary pressures continue to fuel affordability concerns.

Overall purchase applications were down 40% from a year ago, the MBA cited, especially as historically low rates remain fresh in buyer’s minds. A year ago, rates for the average 30-year fixed mortgage were 3.38% – now they are sitting at 6.49%.

The slump in activity has left sellers similarly discouraged. The number of consumers that said it’s a good time to sell fell sharply from 59% to 51% in October, according to Fannie Mae. Year over year, the figure was down 18.8 points.

The sentiment has translated to a decrease in seller activity, with newly listed homes declining an annual rate of 17.2% in November. Existing home sales were also down for the ninth consecutive month in October.

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“Sellers are also taking a break from the market at the moment. We have a record high number of people with mortgages down at around 3%,” Tucker said. “They look at conditions today, thinking about selling their home, moving across town, [and say] ‘we're going to need to get a mortgage of more than like 6.5% or towards 7%’.”

“That’s a huge disincentive to sell and move,” Tucker said.

Sellers have also been forced to be more open to negotiating prices. The share of homes with a price reduction was 19.6% in November, up from 9.2% a year ago, according to Realtor.com. In November, 37% of builders cut prices, up from 26% in September, with the average price reduction of 6%. Builders are also offering to buy points and mortgage buy-downs for buyers.

According to Tucker, the slowdown in activity may push home prices down even further as sellers adjust to the new reality.

“Both supply and demand are getting hammered by these high rates,” Tucker said. “The biggest casualty is sales volume, just not a lot of transactions occurring… It's kind of surprising how little prices are falling given how much activity has fallen.”

‘Home prices won’t collapse’

House for Sale by Owner, Forest Hills, Queens, New York. (Photo by: Lindsey Nicholson/UCG/Universal Images Group via Getty Images)
House for Sale by Owner, Forest Hills, Queens, New York. (Photo by: Lindsey Nicholson/UCG/Universal Images Group via Getty Images)

Buyers waiting for home prices to fall sharply shouldn’t get their hopes up, according to Tucker. Instead, home prices are likely to “plateau” next year, according to Zillow projections.

Inflation, elevated mortgage rates and limited inventory levels will continue to gatekeep home prices from making any significant downturns next year, Zillow forecast. However, if the Federal Reserve achieves its fight against inflation next year, it’s likely that mortgage rates may even stabilize in 2023.

“We're starting to see some better buying conditions. Homes are now on the market for twice as long as they were last year, so buyers aren't rushed anymore. A lot of people are just waiting to see a little bit of price relief and especially some mortgage rate relief,” Tucker said. “When that comes along, that will actually bring more buyers back into the market.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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