The Homebuyer's Dilemma: As Mortgage Rates Fall, House Prices Soar out of Reach

Kyle and Sara Sutton have been “looking aggressively” for a three- or four-bedroom, two-bath home in Grand Rapids, Mich. since April. Though they’ve made offers on five houses so far — even one without those much-coveted two bathrooms — they’ve lost out on all of them.

That’s despite increasing their budget by $50,000 (up to $300,000) and offering up to $30,000 above asking price.

“It feels like there’s no way we can compete in this market,” Kyle says. “As terrible as it would be for so many people across the country, we’re hoping for a massive drop in the housing market soon — or for us to win the lotto, which seems just as likely as winning a bid on a house right now.”

The Suttons’ story is a common one these days. With record-low mortgage rates, buyers are flocking to the market, hoping for serious savings or more house for their money. The only problem? Home prices are skyrocketing.

Data from real estate brokerage Redfin shows that record-low mortgage rates have led to a 6.9% increase in homebuyer purchasing power, allowing the average buyer to afford about $33,000 more home than a year ago. But rising home prices, which jumped 8.2% for the same period, are “effectively cancelling out” those benefits.

To be clear, housing is still more affordable than in 2019. But the real savings from those record-setting mortgage rates? Those were locked in months ago.

“Shoppers brave enough to buy a home earlier this year got an unbelievable deal,” says Ali Wolf, chief economist at Zonda, a real estate research firm. “Since then, mortgage rates remained low, but home prices shot up. Housing affordability is still reasonable today but nothing like the levels seen in March, April, and May.”

Compromise required

Increasing prices are also making the shopping process more difficult — especially as for-sale inventory continues to dwindle. According to the Census Bureau, there’s currently just a 3.3-month supply of homes on the market, the lowest level on record.

“The supply of existing and new homes for sale is very low,” says Odeta Kushi, deputy chief economist at title insurer First American. “Homes that do come to market are being sold quickly, and bidding wars are escalating prices.”

In order to find homes in their price range, many buyers are having to make tradeoffs. They’re looking outside their ideal locations, opting for smaller properties, or taking on more work than they’d expected.

Recent homebuyer Jenna Satariano is one such example. When looking to buy a home in Long Beach, Calif. this summer, Satariano struggled to find an affordable home near friends and family on the coast. Eventually, she settled on a property more inland — about 15 minutes from her original target area. Though it was within budget, it also didn’t check all the boxes feature-wise.

“We were dead set on having two bathrooms, but due to the slim pickings and rising prices, we ended up with a two-bedroom and one bath,” Satariano said. “We have plans to add another bathroom within the next year.”

Satariano and her boyfriend expect the upgrade will cost upwards of $12,000. Since moving in September, they’ve already spent about $15,000 on other renovations — including adding central AC and insulating the garage.

According to Grant Moon, founder of real estate listing platform Home Captain, Satariano’s fixer-upper approach is a good one for buyers struggling to find a home in today’s market.

“It will give you a little more buying power,” he says.

Bigger budget, more money down

Having to compromise on size and location — or factor in renovations — aren’t the only challenges that come with higher home prices.

“As home prices rise, the amount needed for a down payment will also increase,” Kushi says.

Though the increase is relatively small for buyers only making the minimum down payment (3% on some loans), for those looking to avoid mortgage insurance, the price could be hefty. To avoid mortgage insurance costs on a conventional loan, you’d need at least a 20% down payment. On a $200,000 home, that’s $40,000. If the price of that home jumps 8.2%, as Redfin’s data indicates, that down payment rises by about $3,000.

According to Kushi, the increase is likely to hurt first-time homebuyers most. Move-up buyers should have the cash from their previous sale to help soften the blow.

First-time buyer Danielle Marchell is the perfect example. When she finally got off a waitlist for a new construction home in Austin, Texas this summer, prices had jumped. She not only had to compromise on her lot location and upgrades — her down payment rose by $8,000, too.

Though it’s a sizable increase, Marchell is hopeful she can make it work. “I don't have to provide most of it until the end of the process, so I'm trying to tell myself that I have ample time to save,” she says.

Housing affordability won’t last forever, so act fast

At the end of the day, housing is still relatively affordable. According to the most recent Real House Price Index from First American, consumer house-buying power — which factors in both interest rates and income trends — increased about 2% in July.

But as prices continue to rise, that affordability will decrease. “There are very few reasons to believe housing affordability will get better in the coming months,” Wolf says. “Housing supply — both on the new and resale side — is not keeping up with demand.”

That’s the key: housing supply. Unless the inventory shortage eases, prices will likely rise for the foreseeable future.

As Kushi explains, “It doesn’t look like demand is letting up, so without a significant increase in housing supply, it appears the upward pressure on house prices will remain.”

Looking to buy a home before affordability slides further? Then you’ll want to act fast — and be prepared for some stiff competition.

“Speed wins in homebuying, and buyers should be ready to move quickly,” says Omeed Salashoor, certified mortgage planning specialist at mortgage lender Homebridge. “They should have their loan completely dialed in — pre-approved and underwritten — as soon as possible.”

Waiving inspections, writing a personalized offer letter to the sellers, offering a leaseback, or including an appraisal gap clause — which guarantees the seller you’ll cover your full offer, even if the appraisal comes in low — can all give you a competitive edge as well.

But be warned: Even with these strategic moves, you still might lose out on that dream home — and the Suttons are proof.

“We have waived inspections, made large appraisal gaps, allowed 30 to 60 days possession after close and written letters. Still no luck,” Kyle says. “At this point, we’re pretty burned out on the process and don’t know how much harder we’ll keep looking.”

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