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Home prices and interest rates continue to rise

In this changing market, many buyers are finding that they have to get creative

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Photo (c) krisanapong detraphiphat - Getty Images
The U.S. housing market continues to pose challenges to buyers as prices continue to rise, along with interest rates. The combination makes monthly payments higher and could put many homes out of reach for the average buyer.

From mid-February to mid-March, the median home price surged 17 percent year-over-year to $330,250, according to real estate broker Redfin. The company says it’s the biggest four-week increase since 2016.

"This time last year, the housing market was shutting down as many cities implemented strict shelter in place orders,” said Redfin Chief Economist Daryl Fairweather. “A year later the pandemic is still with us, but the housing market is red-hot.”

Fairweather says the competition for the declining number of homes for sale is so intense that some buyers are acting irrationally. He says bidding wars have stretched valuations in some markets, and buyers are coming up with extra cash to make the purchase.

Not a bubble

If that sounds like a bubble, Fairweather says it isn’t. He says the demand is real, and there are enough people who can afford to pay the higher prices homes are now bringing.

“Bubbles burst; I don't see that happening,” he said. “The best hope buyers have is that home prices start to grow at a slower pace, but I don't expect prices to fall."

While homes cost more, so do mortgages. The average 30-year fixed-rate mortgage is around 3.25 percent, about a half-point higher than a month ago. On a $250,000 mortgage, the difference in the monthly payment is $61 a month or $732 a year.

Rates are rising because the yield on the Treasury Department’s 10-year bond has risen sharply over the last month over concerns that monetary and fiscal policy will set off a round of inflation.

Get creative

So, what’s a buyer to do? Some are getting creative.

The Wall Street Journal reports that the pandemic and resulting increase in home demand and prices have led to a rise in multi-generational family members chipping in and buying a home together. Around 15 percent of home sales between April and June last year were multigenerational purchases.

According to the National Association of Realtors (NAR), past multi-generational home sales were largely motivated by caring for aging parents. In the last few months, affordability has also been a driver of the trend.

Homebuilders, such as DR Horton, have begun offering multi-generational home plans. These homes usually offer a separate living area under one roof, often with a separate entrance.

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