When it comes to interest rates, a little increase can make a big difference in a potential homebuyer’s monthly mortgage payment. And for some South Carolinians, those rate increases can mean not being able to buy a home at all.

Interest rates on a 30-year fixed-rate mortgage ticked above 5 percent in April, a level they hadn’t ascended to in over a decade, according to Freddie Mac. For potential homebuyers in the Palmetto State, the increase means another potential financial challenge in addition to home prices that have rocketed into record territory over the past two years, and a chronic inventory shortage that’s stoked intense competition for available properties.

Combine the increase in median home price and the rise in interest rates, and “the monthly cost of owning the median home in Charleston has gone up about 25 percent since the start of the year,” said Dave Sansom, chief financial officer at Carolina One Real Estate in Charleston.

“Is that pricing people out? Yes. And a lot of what it’s doing is making people shop down from where they were — if they were shopping for a $600,000 house before, they might be shopping for a $500,000 house now. But yes, that’s absolutely having an impact, no question.”

Trying to stem inflation by tamping down demand for goods, the Federal Reserve raised its benchmark interest rate by a quarter point in March, and then followed with a half-point increase in May. The week ending May 12, the interest rate for a 30-year fixed mortgage reached 5.3 percent, a height it had not hit since 2009.

At that rate, a buyer purchasing a $250,000 home would pay $3,300 more annually compared to April of 2021 when the rate was below 3 percent, according to the National Association of Realtors. 

First-time homebuyers, for whom an extra $3,300 a month may prove insurmountable, will almost certainly feel that financial sting the most. NAR senior economist Nadia Evangelou estimated that 1.9 million first-time homebuyers will be shut out of the market this year, according to Barron’s.

Rate increases giving buyers pause

“It’s definitely not going to be the pattern of the past where you start your own household in your 20s or 30s. That’s going to be delayed,” said Jill Moylan, CEO and broker at Home Advantage Realty in Columbia. “And the more disturbing problem to me is thinking about all those people who can’t buy for the first time, and are just sinking so much money into the rental market. That’s just a tremendous amount of money that’s going from their household, and their nest egg, into someone else’s pocket.”

Amanda Hamet, vice president of sales and broker-in-charge at Coldwell Banker Caine in Greenville, believes first-time homebuyers won’t be the only ones sidelined by rising interest rates. “I also think it causes pause for a lot of buyers because we haven’t seen interest rates go up this high in 10 years,” she said. “For years the Fed has been telling us that interest rates would go up, but they just haven’t, even though that’s always the projection. Now we’re starting to see that be the case, and it could cause some pause for buyers.”

When interest rates first began increasing in March, industry experts expected a renewed surge of sales as homebuyers sought to lock in rates before any further increases. But the Charleston, Columbia, and Greenville markets all saw closings dip in April compared to March, and fall year-over-year. Statewide, South Carolina saw a 12.8 percent year-over-year sales decline in April, according to S.C. Realtors, its second straight month in negative territory.

Those declining sales numbers are evidence of the toll rising interest rates take on the resale market, given that existing homeowners don’t want to incur a higher rate with a new purchase. Nationally, existing-home sales tumbled nearly 6 percent year-over-year in April, according to the NAR. “When you’re sitting on a 3 percent rate and you’re looking at a 5 percent rate, it’s just not that attractive,” Sansom said. “For the people who aren’t driven by the need for more bedrooms, it definitely puts them on the sidelines.”

Even with the recent increases, current interest rates still remain far below what some buyers faced in decades past. Baby boomers can certainly recall rates that rose to over 18 percent in 1981, also spurred by a Fed attempt to rein in inflation.

Rates remained in the double-digits until 1990 and were jolted back up to around 7 percent by the 2008 financial crisis, but American homebuyers have benefited from rates of between 3 and 4 percent for most of the past two years.

But the recent rate hikes have coincided with historic home appreciation in many parts of South Carolina, leaving some prospective buyers reeling from a double financial blow. A torrent of demand unleashed by the end of pandemic lockdowns in the summer of 2020 — and augmented by a work-from-home movement that’s increased the number of transplants moving to the state — has raised median sales prices nearly $80,000 statewide over the past two years, according to S.C. Realtors.

“There are real people who are in just untenable situations. And it’s not just interest rates, it’s the whole ball of wax,” Moylan said. “Everything is conspiring against the consumer in these cases.”

No slowdown in home prices

Between April 2020 and April 2022, the median sales price rose from $290,000 to $399,000 in greater Charleston, from $225,000 to $298,000 in metro Greenville, and from $140,000 to $213,000 in the Midlands, according to their respective Realtor associations. Clearly the dip in statewide sales activity hasn’t yet put a damper on prices, which continued to rise across the state by double-digit margins in April.

“We are not seeing a slowdown in the demand,” Hamet said. “Now, of course, different price points have different impacts, but overall demand has continued to stay strong. And the rising interest rates, I don’t expect that to significantly lessen the demand. What it does impact is affordability. For that first-time homebuyer in particular, it’s a tough market to compete in. What they could buy in January is different from what they could purchase now.”

That’s led to the rise of nontraditional solutions like startups that will front buyers money — either in the form of a loan, or in equity from their current home — so they can compete with cash offers. Hamet added she’s also seeing a return of adjustable-rate mortgages, which traditionally have lower initial rates than a 30-year fixed. And Moylan’s agency has begun partnering with a Columbia charity that helps families avoid slipping into homelessness.

“There are families who find themselves on the edge,” she said. “In today’s housing market, it’s tough for people who don’t happen to have pockets padded with cash.”

NAR chief economist Lawrence Yun projects a reduction in competition for available homes by summer, although experts believe prices are likely to continue to rise as long as inventory struggles to meet buyer demand. As for interest rates, Sansom thinks the market can tolerate numbers in the range of 6 or 7 percent — but not a return to the 1980s.

“If they end up in the 14 percent range, I don’t know what that looks like. Certainly not good,” he said. “But from what I’ve heard from our mortgage joint venture partner is, they feel like we’ve had most of the run-up we’re going to have already in mortgage rates. I don’t know if they’re right, obviously, but they don’t think we’re heading for those higher numbers.”