Buying a home is less cutthroat but still not easy as mortgage rates rise

The housing market is slowing, and buyers no longer face the kind of cutthroat competition that defined the market earlier in the pandemic.

But there still aren’t enough homes for sale to meet demand. And although home prices are not skyrocketing as they had been, plenty of buyers are concerned about being able to afford a home, especially as mortgage interest rates continue to climb.

Controlling for seasonal market shifts and quality of homes, the average price of homes in Philadelphia fell 1.8% over the summer, according to analysis by Drexel University economist Kevin Gillen. It was the largest quarterly drop in eight years.

It’s a sign of the cooling market, which features declining affordability, buyer exhaustion, and limited supply, as well as rising interest rates, Gillen said. Although property owners still have the upper hand, the market is “shifting away from sellers,” he said.

But despite recent declines, home prices are still higher than they were a year ago. Since last year, the rate of annual price growth has just slowed.

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The home price index measuring changes in general prices in Philadelphia was up about 6% last quarter compared to the same time last year, according to Gillen. Three months earlier, the index was up almost 13% from a year ago. House price appreciation citywide and within various regions of the city fell into the single digits last quarter for the first time during the pandemic.

Philadelphia homeowners continue to benefit from price appreciation, especially those who have held onto their homes for longer periods of time. Over the last decade, house prices in Philadelphia rose more than 85%, according to Gillen.

Home buyers face decreasing affordability, especially with mortgage rates at a two-decade high and incomes failing to keep pace with the cost of owning a home.

Renters in 46 of the 50 largest cities in the country cannot afford a starter home, according to a report by Point2, a real estate search portal and division of Yardi Systems Inc. That’s thanks to mortgage rates and a shortage of small, affordable single-family homes.

Renters in Philadelphia are doing better than in most other big cities, but many still don’t earn enough to afford to buy a home.

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The city’s renters make an average of $36,648, but the income needed to afford a mortgage is about $42,300, according to the Point2 analysis.

Philadelphia is in the top 12 cities where renters make 80% or more of the income needed to buy a starter home. Renters in 15 of the 50 largest cities make less than half the amount needed.

Since home prices are up, down payments also are on the rise. And because of rising mortgage rates, home buyers may choose to spend more on a down payment if they can and take out a smaller loan.

Homeowners may need to use more of their profits from a sale for the up-front cost of buying another home.

One of the biggest challenges for first-time home buyers is having enough money for a down payment, since these buyers can’t use profits from a previous sale.

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Across the country’s 50 largest metropolitan areas, a down payment on a home averages more than $62,000, according to a LendingTree analysis of more than 960,000 users who were offered 30-year, fixed-rate mortgages this year through early October. The average down payment is 35% higher than it was in September 2021.

Across these metros, the average down payment represents 58% of the area’s average annual household income, according to LendingTree.

Average down payments in a few metros in California — San Jose, San Francisco, and Los Angeles — are higher than $100,000. In the metros with the lowest average down payments — Oklahoma City, St. Louis, and Virginia Beach, Va. — this expense is around $40,000.

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The Philadelphia metro area ranks in the middle of the list. The average down payment across the region is $58,147, which is out of reach for many. Even if a buyer makes the average annual household income of $109,597, the average down payment is more than half that amount, according to the report written by Jacob Channel, senior economist at LendingTree.

“With home prices showing signs of finally coming down, down payments could also start to fall over the coming months,” Channel said in a statement. “With that said, down payments aren’t going to go away for most people, and buyers should still do their best to save as much as they can for a down payment before they set out to buy a home. Remember, the more you save, the easier it often is to get approved for a loan.”