Low Rates Doing Little to Help First-Timers

A picture of a set of keys on a ring with a simple house keychain

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Higher home prices are overshadowing potential savings from historically low mortgage rates, according to a new analysis by CoreLogic, a real estate research firm.

“[The] 2020–2021 pandemic housing market recorded the fastest annual home price appreciation in the 45-year history of the index,” Yanling Mayer, principal economist for CoreLogic, writes in a March 18 analysis on the company’s website.

Record-low mortgage rates are often cited as helping to boost affordability in the current market. But how much have low rates helped?

Buyers who financed their purchases using FHA loans, which tend to skew toward first-timers, have seen a rapid rise in typical monthly payments, despite record-low interest rates, Mayer writes. During the second half of 2021, the typical monthly out-of-pocket cost for those using FHA financing was $1,710—up by 19.7% from the rates just before the beginning of the pandemic, CoreLogic reports.

Monthly payments on homes purchased with VA loans posted a double-digit increase as well, jumping 11.3% from pre-pandemic levels, the analysis reports.

However, buyers who have financed their purchases using conventional loans have locked in more savings from lower interest rates. They’ve seen monthly payments rise by 3.3%, or $57 per month, in comparison.

“Many of these home buyers are likely repeat or trade-up buyers who were able to afford a large down payment to obtain a more favorable interest rate,” Mayer writes. “First-time home buyers often use FHA loans for financing lower-priced starter homes, and the surge in starter home prices has inadvertently eroded affordability and contributed to pricing out families who hope to become first-time homeowners.”