Interest rates have been rising so fast that many buyers who signed contracts to purchase new homes in the last year have been caught off-guard.
Mortgage rates were at record lows of 3% or even less in some cases last year. Yet, a series of sudden increases have sent mortgage rates to 5.3% as of this week.
The resulting increases mean that some buyers will see their monthly mortgage repayments go up by hundreds of dollars a month. While some may be able to absorb those costs, others told the Wall Street Journal that the extra costs are just too much to bear. As a result, they’re walking away from the deal and sacrificing the deposit they put down.
Builders have struggled over the last couple of years with supply chain challenges and delays in obtaining vital building materials. As a result, homes are taking much longer to build, with buyers forced to wait many months for their new properties to be completed.
While they’ve been sat around waiting for their homes to finish, interest rates have soared, causing many to reassess their plans.
The Journal reported that new home buyers who signed contracts in 2021 likely calculated their mortgage repayments based on the record-low rates at the time. Lauren Sparks and Taylor Briggs of Savage, Minnesota, told the Journal they paid a deposit on a new home last summer. At the time, the interest was just 2.875%. However, by the time the house was completed in February, interest rates had shot up. They received a 45-day rate lock at 4.375%, and paid more upfront to lower their rate to 3.625%.
The 30-year fixed-rate mortgage last week rose again, averaging 5.3% according to Freddie Mac data. It means that the average monthly mortgage payment on a median-priced home has increased by around $520 per month since January, when rates averaged just 3.2%.
Buyers of existing homes feel the impact of mortgage rate spikes less as they’re usually able to close on a sale within a month or two of signing the contract. But for new homes, it can be several months between signing the contract, paying the deposit, and actually being able to move in.
"It's just introduced a lot of uncertainty and volatility into the consumer’s decision," Rick Palacios Jr., director of research at John Burns Real Estate Consulting LLC, told the Journal. "The chances of [the buyer] no longer being able to qualify for this home go up significantly."