Americans are happy to pay more for a home, but they aren’t so keen on higher mortgage rates. That dynamic was evident his morning in an update from D.R. Horton, the largest U.S. homebuilder.
The Texas-based builder’s new home orders dropped 2 percent from the year-earlier period, which Horton Chief Executive Officer Donald Tomnitz attributed to consumers’ high sensitivity to tiny interest rate changes. “I don’t mean to date myself, but … no one around this table can remember mortgage rates being higher than 6 percent or 7 percent,” he said. “And I think one of the factors that we are dealing with, quite frankly, is most analysts, and most young buyers—especially first-time home buyers in the market today—have been accustomed to low rates for all their lives.”
That may be the case. But buyers might also be getting a little better at mortgage math, given the brutal lessons the real estate market doled out in 2008 and 2009. A single percentage point over three decades adds up fast.
Take the average D.R. Horton home. A year ago, it sold for $227,304, which a buyer could have financed for 30 years at around 3.38 percent, according to Freddie Mac. Recently, it sold for $261,400, and buyers probably locked in a rate around 4.49 percent.
The difference in sales price is only $34,096, but the 2013 buyer will end up paying about $104,000 more over the life of the loan, including an additional $64,000 or so in interest payments. That’s not an insignificant amount of cash. It’s enough to cover a bare-bones Tesla; it’s also roughly 25 percent more than the median household income in the U.S.
Which is not to say homebuilders are in serious trouble. Horton booked a 40 percent increase in both sales and profit in the recent quarter. But the buyers required to fix up the U.S. housing market may need a little more encouragement to stay on board.