Mortgage rates are going up, taking apartment rents with it and cooling home sales.
29-Sep-22 – With rising interest rates and runaway inflation underway, the horizon is extremely cloudy for Chicago home buyers and apartment renters.
On September 22, the Federal Reserve aggressively raised its key funds rate by a hefty 0.75 percent for the third consecutive time and signaled that more large interest hikes are coming before the end of 2022.
In an effort to cool inflation to a targeted 2 percent from the current 8.3 percent, the Fed boosted its benchmark short term funds rate to a range of 3 to 3.25 percent – the highest level since early 2008.
The move immediately pushed benchmark 30-year fixed mortgage rates to an average of 6.29 percent nationwide from 6.2 percent a week earlier, reported Freddie Mac’s Primary Mortgage Market Survey. A year ago, 30-year fixed loans averaged only 2.88 percent.
“The housing market continues to face headwinds as mortgage rates increased again,” said Sam Khater, Freddie Mac’s chief economist.
By earlier interest rate standards, that still could be considered affordable. In 1994, when this writer launched The Home Front column in the Pioneer Press newspapers, benchmark 30-year fixed mortgage rates averaged 8.75 percent and were inching toward 9 percent.
Twenty-eight years ago, home buyers needed an income of $46,200 to qualify for a $100,000 home loan on a typical $125,000 house with a monthly payment of $1,078.
Today, a borrower who places a 20 percent down payment and takes out a 30-year fixed rate loan of $300,000 at 6 percent interest this week would make a monthly principal and interest payment of about $1,800.
Fifteen-year fixed-rate mortgages rose to an average of 5.44 percent nationwide on September 22 from 5.21 percent a week earlier, Freddie Mac reported. A year ago, the 15-year fixed loan averaged only 2.15 percent.
The Freddie Mac survey is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20 percent down and have a FICO score of 740. Borrowers with lower credit scores will pay a higher interest rate.
Landlords feel the pinch
Apartment owners also are feeling the pinch of creeping inflation and soaring real estate taxes. And, those forces are causing rents to rise.
In Chicago, annual rent increases currently average 4.5 percent in North Side walk-up buildings. However, pandemic “catch up hikes” of up to 20 percent have occurred in posh downtown high-rises, experts say.