They signed contracts for their dream homes last year. Now their borrowing costs are skyrocketing.

People who have agreed to buy homes under construction but have yet to close are facing mortgage interest rates that could be nearly double what they expected when they paid their deposits.

New home buyers face multiple hurdles this year, from soaring mortgage rates to home construction taking longer than usual due to supply chain and labor constraints. ‘work.

Many homebuyers who signed contracts for new homes in 2021 or early this year calculated monthly payments based on near-record mortgage rates of around 3% or less. But average mortgage rates soared this spring to 5.3%, according to Freddie Mac,

when the Federal Reserve began raising short-term interest rates.

The difference can mean hundreds of dollars more per month in mortgage payments, leaving buyers with the choice of swallowing the extra costs or forgoing the deal and potentially sacrificing the deposit.

So far, borrowers have been largely willing to absorb the extra costs to keep their purchase, according to mortgage brokers and homebuilders.

But the combination of rapidly rising new construction prices and rising mortgage rates is expected to shrink the pool of new-build home buyers in the coming months.

Buyers of existing homes face much less interest rate risk, as they typically close a deal within a month or two of signing a contract. Homebuyers worried about sudden rate fluctuations can lock in a mortgage rate, often for 30 or 60 days.

New home buyers, who account for more than 10% of home purchases in the United States, often sign contracts and pay down payments months before their homes are ready.

Supply chain issues have slowed construction times and delayed many home closings for additional weeks or months.

With the average 30-year mortgage rate hitting 5%, home ownership may now be out of reach for millions more Americans. Dion Rabouin of the WSJ explains the impact for potential buyers, sellers and the housing market. Illustration: Adele Morgan

“It just introduced a lot of uncertainty and volatility to the consumer’s decision,” said Rick Palacios Jr., director of research at John Burns Real Estate Consulting LLC. “The chances of [the buyer] no longer being able to qualify for that house increases dramatically.

Builders can resell out-of-contract homes to other buyers on their waiting lists, Palacios said. But in an April survey by his company, some builders reported that their waiting lists of potential buyers are shrinking as interest rates rise.

When Lauren Sparks and Taylor Briggs put down a down payment on a new home with a yard in Savage, Minnesota last summer, their loan estimate had an interest rate of 2.875%. In January, they had the option to lock in an interest rate of 3.75% for 75 days, but they decided not to do so in case construction was delayed beyond the 75-day window, a said Mr. Briggs.

“I had no idea rates were going to explode as much as they were,” he said.

In February, the couple opted for a 45-day rate lock at 4.375% and paid more up front to lower their interest rate to 3.625%, Mr Briggs said. The purchase was completed in March.

Most buyers stretch their budget rather than give up on the purchase, unless they can’t qualify for a mortgage at the current rate, mortgage brokers and real estate agents say.

Many buyers who agreed to buy a home months ago are reluctant to go back on the deal and start shopping again. The number of existing homes for sale is near record lows and home prices continue to rise sharply each month.

Stephanie Dodoo and Micah Barber, with their daughter Lyric. When construction of their home was delayed and interest rates started to climb, they considered moving out.


Photo:

Jeff Clark

Micah Barber and Stephanie Dodoo decided last year to replace their Austin, Texas home with a bigger house on the same lot. They made installments to a builder in September and October and expected construction to begin in January. When that was delayed and interest rates started to climb, they considered walking away, Mr Barber said.

“There is quite a significant difference, when you borrow a six-figure amount, paying 3.5% and paying 5.5%,” he said. “I lost some sleep.”

They originally planned to take a fixed rate mortgage, but switched to an adjustable rate mortgage with a fixed rate of 3.75% for the first 15 years after the house was built.

In response to rising interest rates, builders are helping buyers lock in rates. Taylor Morrison Home Corp.

Chief executive Sheryl Palmer said on an April 27 earnings call that the homebuilder likely saw more six-, nine- or 12-month rate freezes in the past 10 days than in the past. last five years.

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Mortgage broker Chris Robson in Fresno, Calif., said many of his clients buying newly built homes are opting for nine- or 12-month rate locks, which can be had at a higher price than the mortgage rate. current interest.

In some cases, he said, buyers who prequalified at lower rates had to pay off or refinance other debts, like auto loans, to stay qualified at current rates.

On the bright side, some workers have gotten raises since being prequalified nine or 12 months ago, which has helped offset the effect of the higher interest rate, Robson said.

Bob and Anna Bergen signed a purchase agreement with a home builder in February after struggling to find a home in suburban Detroit. They expect their home to be completed in early 2023.

Bob and Anna Bergen forecast a mortgage interest rate of 5.5%.


Photo:

Rachel Wallace

“It’s exciting, but scary at the same time,” Mr Bergen said. They haven’t shopped around for a mortgage yet, but they expect an interest rate of 5.5%. The couple also plan to list their current home next year when the new home is ready.

“Financial uncertainty is, I would say, probably the highest point in all of recent history, for how quickly rates or the housing market could change,” he said.

Write to Nicole Friedman at [email protected]

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