'I don't want to be house broke:' Mortgage rates hit 20-year high after skyrocketing prices

When 27-year-old Mariah Thatch began looking for a home in Indianapolis this fall, it quickly became clear she couldn't afford a house due to rising mortgage rates.

“I don't want to be house broke, and that's how I felt like I was going to be,” Thatch said.

She was looking into central Indianapolis, Fountain Square and Bates-Hendricks, where the homes inside her price range, $150,000 to $200,000, were hard to find. The median prices rose nearly to $300,000.

To control inflation, which had affected everything from food to gas to housing, the Federal Reserve has been raising interest rates to make it more expensive for people and companies to borrow money. That had the intended effect of slowing down a housing market that was spiraling out of control.

While the higher rate has pushed out some low- and middle-income buyers, there still aren't enough houses to meet the demand, housing experts say. The high rates are another challenging turn in a turbulent housing market that's becoming increasingly out-of-reach for many middle class Americans. As a result, they get stuck in a skyrocketing rental market where they may need roommates to split the cost.

Though interest rates remain high, more people could start putting their houses on the market in the first quarter of 2023, which would increase supply to meet demand, experts say.

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Market returning to some state of 'normal' 

During the pandemic, mortgage rates were historically low. Many people took advantage of it to flood the housing market, but that temporary boom ended this year.

A year ago, the low interest rates spurred bidding wars where offers regularly were tens of thousands over asking price. Buyers sometimes waived home inspections, a critical step to ensure there are no major problems with the house, to win competitive bids. 

The median sales price in Central Indiana rose about 20% from June 2021 to June 2022, according to MIBOR data. 

Now, homes are staying on the market longer and bidding wars have become less common, said Chris Cook, a real estate agent who works in Indianapolis.

In 2020, the average cost of financing a $200,000 home over 30 years had an interest rate of 2.67%, according to Freddie Mac, which would come to about $800 a month in payments, plus taxes and home insurance.

By November 2022, the rate had more than doubled to a peak of 7.08%, according to Freddie Mac, which comes to about $1,300 a month plus taxes and home insurance in payment over 30 years.

COVID-19 housing boom

President of F.C. Tucker Company Jim Litten said the low mortgage rates seen in 2020 and 2021 were atypical, with homes flying off the market quickly as demand outweighed supply. It was unlike anything he’d seen in his 50-year career, he said. 

“I'm not sure that we'll see rates go back down that low again for a long time,” he said.

Though COVID-19 was undoubtedly a period of great global unrest, it benefited the housing market, Litten said. With the vast majority of people spending all their time at home, and many having more disposable income due to not having to pay for things like gasoline, people took that extra coin and invested in their homes.

When the economy started to open back up in the United States in May 2020, F.C. Tucker had its biggest sales month in 100 years, Litten said — and the numbers only went up from there.

But now interest rates are slowing things down.

After six interest rate hikes this year, the Federal Reserve raised interest rates a seventh time in 2022 Wednesday by half a percentage point.

By historical standards, around 6.25% for a 30-year fixed mortgage isn’t that high, Litten says.

Comparatively, rates haven’t been near this high since spring of 2002, when 30-year fixed rates hit 7.18% the week of March 29, according to Freddie Mac data. 

Nationwide, Litten said, Indianapolis still is considered among the most affordable major housing markets in the country. But within the city, prices are rising at a rate that’s untenable for many homeowners who’d be otherwise interested.

Barring extraordinary circumstances, Litten said he expects more people to start putting their houses on the market in the first quarter of next year.

“We're gonna get back to a more normal market,” Litten said. “And a normal market means that it takes four to six months to sell a home.”

By November 2022, it would take 1.7 months to sell all the homes in the central Indiana area, according to a recent MiBOR report.

At its recent peak, the region had fewer than one month worth of homes for sale. That means the market is still getting back in balance. 

The median home in Central Indiana cost $277,000, which is on the decrease. The number of homes sold also decreased while the length of time a home was listed before being sold increased. 

Home buying power reduced

Families that can afford $150,000 homes last year can only afford to buy $110,000 homes this year based on the mortgage rates, said Joe Hanson, an administrator at a nonprofit that helps low- and middle-income families buy homes.

Homes in that price range may come with more trouble than they are worth.

"That's a huge difference," Hanson said. "The homes priced at $110,000 are not in good condition." 

With so many people squeezed into the rental market, that's driving up prices there as well. As prices increase in both markets, people are forced to make hard decisions.

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Kelli Foster, 30, said home buying experience was “extremely anxiety-inducing” and that everyone was telling her to wait until the market improved. But despite that, Foster, a cardiac surgery physician assistant, did some research and decided to jump in anyway.

“It sounded like the aftershock of this was something that was gonna last for several years,” she said. “And I wasn't willing to wait several years to buy a house.”

Rent hikes prompted Foster to buy her first home this fall. Her interest rate was high, she said.

Foster bought her home at a 5.87% rate, which she called awful. She’s planning to refinance in a few years. But still, the rent on her one-bedroom apartment in Broad Ripple was rising at an untenable rate — between $1,600 and $1,700 per month.

“I felt like neither one of them were really an economically good option,” she said. “This just felt like the lesser of two evils.”

What’s next for priced-out prospective homebuyers?

As Thatch struggled to find an affordable home in Indianapolis, she learned that there isn't much useful community or government assistance.

She looked into a program that would help with her down payment but declined because she would have been locked into a high rate and homeownership for nine years.

So for now, she is living with her sister and looking for an apartment to rent. While her real estate agent keeps sending her listings, she thinks home ownership isn’t in her near future.

Still, she longs for the stability a home would bring.

“I've just seen the people that I know with a house," she said, "and they're not worried about, you know, the rug being yanked out from underneath them, like at an apartment."

Claire Rafford can be reached at 317-617-3402 or crafford@gannett.com.

Binghui Huang can be reached at 317-385-1595 or Bhuang@gannett.com.