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Spikes in mortgage rate force many potential homebuyers to rethink their plans

LEILA FADEL, HOST:

The Federal Reserve's interest rate hikes to tamp down inflation have pushed mortgage rates up this year for the biggest increase in 40 years. That's made homeownership unaffordable for many Americans. But lending rates are also going up and then down sharply from week to week. NPR's Chris Arnold explains why.

CHRIS ARNOLD, BYLINE: Back in January, Jean Ann Baker thought she was finally able to become a homeowner. She'd just gotten a pay raise at her job in special education.

JEAN ANN BAKER: I'm divorced. I'm a single mom. I've been saving up for seven years for a down payment for a house. So I was like, awesome, so I've got 30,000 for a down payment.

ARNOLD: Baker lives in Waco, Texas, and she signed an agreement to buy a new-construction home for $440,000. She's been by a bunch of times with the kids to watch it getting built. But it's not finished yet, and by June, rates on 30-year fixed-rate mortgages had risen from around 3% up to 6%. That's just a huge jump.

BAKER: So I talk to my mortgage guy, and he was telling me that right now I'm not going to be approved for the loan anymore because my mortgage payment will have gone up almost $800 a month. It's more than I could afford.

ARNOLD: She hasn't officially backed out yet, but she's told her kids that it looks like they can't buy the house.

BAKER: My 7-year-old - he was in tears 'cause we were thinking forever home. You know, like, this was going to be where they finished out their childhood, was going to be this house.

ARNOLD: If rates fall low enough again to, say, 4 1/2% she could afford the house. And that's not impossible. Mortgage rates have been jumping up and down. Where they go next has a lot to do with what investors and financial markets think is going to happen with the economy and inflation.

Mike Fratantoni is the chief economist at the Mortgage Bankers Association.

MIKE FRATANTONI: So there's really two dueling narratives out there. One is that inflation is going to persist.

ARNOLD: That scenario is that higher inflation will continue to be very bad, and that will force the Federal Reserve to keep raising the interest rates that it controls to fight inflation. That's the fear that led financial markets to push mortgage rates up so much so quickly.

FRATANTONI: The jump from 3% rates at the beginning of the year to above 6% in June.

ARNOLD: But there is another narrative out there, too, and that one is that the problem with inflation will get better because the economy will slow down.

FRATANTONI: The global economy has gotten much, much dicier. It looks like there's going to be a deep recession in the U.K. and in Europe. China has slowed down. So you have this global environment of much weaker growth, which is going to be a challenge for U.S. companies.

ARNOLD: So a slowdown, even a mild recession. People won't spend as much. Inflation calms down. In that scenario, the Fed won't have to keep raising interest rates as much as we thought. A couple of weeks ago, that narrative helped drive mortgage rates back sharply lower to a bit below 5%.

FRATANTONI: Whatever economic news comes in, it's supporting one or the other side of this story, the inflation versus recession debate. And so you get everybody running to one or the other side of the boat.

ARNOLD: Everybody runs to the scary inflation side of the boat, rates go up. They run the other way and rock the boat back, and rates go down.

FRATANTONI: Exactly. Financial markets are reacting by showing these really wild swings in rates.

ARNOLD: In the past couple of weeks, rates have stayed well below 6%.

Skylar Olsen, the chief economist at Zillow, says that's probably a good sign for mortgages and inflation.

SKYLAR OLSEN: It does seem that the market believes the Fed will be fixing inflation or starting to fix inflation, and maybe things won't be too bad. But, you know, we'll see.

ARNOLD: For her part, Jean Ann Baker in Texas is just hoping that rates dip low enough again that she can afford to buy that house for her and her kids.

BAKER: That's why I haven't walked away from the contract yet because, who knows? It may happen.

ARNOLD: An adjustable-rate mortgage might help her get a lower rate that she could afford, but so far she feels like that's just too risky, not knowing where rates will be in five years when it adjusts.

Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.