Impact of Rising Mortgage Rates on First-Time Homeowners - More focus on homeowners with considerable home equity.

Impact of Rising Mortgage Rates on First-Time Homeowners - More focus on homeowners with considerable home equity.

Mortgage rates dropped to a record low during the pandemic. Many first-time homeowners took advantage of it. 2.38 million Americans became first-time homeowners in 2020, up 14% YoY.

The good days are gone, and the mortgage rates are back with a vengeance. Where does that leave first-time home buyers? 

For a 30-year loan at 2.75%, a buyer can expect to pay $1,837 P&I monthly. As you can see from the image below, the same buyer would have to increase the down payment amount by $53,320.35 to stay at $1,837 P&I. That goes up to a $166,760.61 down payment at a 6.75% interest rate.

What does it mean for the originators?

Accept that the first-time homeowners, if not already, are dropping out of the market. The good news is that there were 1.8 million first-time home buyers in 2018. It was still relatively high. The downside is that several variables changed (significantly). I hypothesize that we will be much below the 1.8 million mark. 

Home prices are still very high, and high inflation rates will continue to pressure monthly disposable income. These two variables will push potential first-time buyers to become wary of using extra cash towards an additional down payment. Furthermore, I would suspect DTI could be increasing for potential home buyers. If the trend continues, home prices will decrease quickly, if not already. 

I think the home prices will continue to fall, but that will most likely inflict more pain on the buyers currently in the market. It could leave them out of any opportunities to refinance when the rates fall.

Although it looks pretty miserable for first-time homeowners, it may not be as bad for homeowners with considerable home equity. Lenders could potentially build statistical models to help target potential homeowners who might be looking to move. For instance, we can test for a null hypothesis that there is no relationship between those who live in a suburban area in their early 40s would likely to move more than those who live in the metro area. If proven against it, then lenders could find ways to target these homeowners with enticing products.