Rising mortgage rates add to affordability squeeze for Seattle-area homebuyers

It’s no longer just sky-high prices and slim inventory squeezing Seattle-area home buyers. Add to the list: rising interest rates.

After hitting rock-bottom lows earlier in the pandemic, mortgage rates have been steadily ticking up this year amid concerns about inflation. Since the start of the year, the average rate for a 30-year mortgage has climbed from 3.22% to 4.72%, the biggest three-month jump since 1994, according to Freddie Mac. 

Rising rates could finally begin to temper the runaway housing market after scores of buyers looked to take advantage of low rates or relocate during the past two years. Nationally, home prices climbed nearly 19% last year, and 14% in King County. Many economists expect that rate of growth to slow this year. 

But for those still trying to buy into pricey markets like Seattle — particularly buyers with less to spend — rising interest rates are introducing yet another challenge.

For every 1% interest rate increase, home shoppers can afford about 10% less for a home, said Jim Murphy, with Caliber Home Loans in Kirkland.

With rates changing quickly, “you’re talking about purchasing a house for more than you anticipated a short time ago,” Murphy said. “If you haven’t talked to your lender since November, you need to.”

As Zachary St. John and his girlfriend looked for a home in Thurston and Pierce counties this spring, higher interest rates made an already tough search even more difficult.

The combination of bidding wars and higher interest rates led the couple to stretch their maximum budget beyond their initial $425,000 and start planning to rent out a room in their new home to a roommate or Airbnb guest to help cover their monthly cost.

“We just can’t be that competitive,” said St. John, who works for a nonprofit and whose girlfriend is in school to become an elementary school teacher. “The houses we’re looking at are the cheapest inhabitable houses in Western Washington.”

The median single-family home price in King County last month was $930,000, up 8.4% from a month earlier and 12.7% from last year, according to data released Thursday by the Northwest Multiple Listing Service.

The median home price was $557,000 in Pierce County, $505,000 in Thurston, $800,000 in Snohomish and $538,500 in Kitsap.

“It’s a double whammy, ” said June Lu, branch manager at a Movement Mortgage branch in Renton. “Prices keep escalating, but their buying power every month they’re seeing reduced by $50,000 to $100,000.”

The uptick comes as first-time buyers face another rising cost: rent.

After dropping in some areas early in the pandemic, rents have rebounded across the Seattle area. In King County, median rent for new leases is up 19% compared to the same time in 2021, according to Apartment List. Rents are up 11% compared to the same time in 2019, before the pandemic.

Home shoppers facing both rent hikes and rising interest rates are “in panic mode,” Lu said.

To deal with rising costs, brokers and lenders say some buyers are looking to areas farther from Seattle, teaming up with family members to buy, or tapping into loans or gifts from parents, though not everyone has access to that type of help. 

Trisha Marques and her husband have been searching for their first home in Seattle after the couple and their young children moved to the area in late 2020 to be closer to family. They hope to stay in Magnolia, where they’ve been renting, but recently had to drop their budget from $1.3 million to $1.2 million because of rising interest rates. 

Marques, who works in marketing and whose husband works at an ad agency, said the couple has expanded their search to other neighborhoods, including Ballard and Fremont, and talked about buying a home that’s “a little older and needs a little more work to be able to get in here.” 

“We’ve had all sorts of conversations, not even can we afford it in Magnolia, but can we afford it in Seattle? It’s tough,” Marques said.

The market still feels competitive for many buyers, but there are signs of cooling.

Nationally, a larger share of home sellers are dropping their prices, according to Redfin. The company’s chief economist, Daryl Fairweather, said in a statement, “sellers can no longer overprice their home and still expect buyers to clamor at their door. That’s because higher mortgage rates are eating into homebuyers’ budgets.” 

In some areas of the Puget Sound region, home shoppers are buying fewer homes than at this time last year. Pending sales throughout King County were down 11.5% in March from the same time last year, according to the listing service. Pending sales were down 8.6% in Pierce County, roughly flat in Snohomish and up 8.7% in Kitsap.

Still, inventory is tight. More new homes were listed for sale last month than in February, a sign of the usual spring uptick. Even so, according to a measure known as months of inventory, it would take less than two weeks to sell all the homes for sale in King, Pierce and Snohomish counties at current demand. The listing service once considered four to six months of inventory a “balanced” market.

“Some buyers are getting scared or turned off by increasing interest rates, but then I also have buyers who think interest rates are only going to continue to increase, so it’s also putting pressure to buy a house even quicker,” Bellevue-based Windermere agent Taylor Brazen Tagge said.

For one pair of Brazen Tagge’s clients, the rise in rates between late last year and March dropped the price of the home they could afford from $940,000 to $800,000 in order to maintain the same monthly payment. “We’ve had to widen our search even more,” she said.

St. John finally found a break this past weekend, when he and his girlfriend secured a two-bedroom 1940s home in Olympia near the state Capitol campus for $435,000. After paying to get a lower interest rate, known as “buying down” the rate, the couple landed at a 4.63% rate, St. John said.

The house will need some work, but “we went all in for what we had,” he said.

“I really feel like if we don’t get a house in this interest rate bump, or the next one or two, it’s going to be unattainable for us.”