Rising interest rates create a new challenge for first-time homebuyers

The Federal Reserve is expected to raise interest rates next month.

The housing market has been unforgiving for first-time buyers like Kirstin Harris.

“You have to be so competitive,” she told ABC News. “The very moment we like a house to make an offer, they have already received an offer which has been accepted.”

Harris and his family are trying to buy their first home in Virginia. But like many other buyers nationwide, she is facing soaring prices and bidding wars, fueled by high demand and a lack of available homes.

“The new inventory that I see coming in has been increased by about $50,000,” she said.

In a ruthless and expensive market, aspiring homeowners now face a new challenge: rising interest rates.

At its meeting next month, the Federal Reserve is expected to raise borrowing costs by raising interest rates as part of a bid to rein in soaring inflation.

“Basically we have inflation because there’s too much demand in the economy for the available supply,” David Wessel, senior fellow at the Brookings Institution, told ABC News. “So the whole interest of the Fed is to slow the increase in demand. They want fewer people to borrow and they want people who are borrowing to borrow less.

Interest rates have already risen in anticipation of the Fed’s announcement.

The rate on a 30-year fixed-rate mortgage rose above 4% this month for the first time in nearly three years. According to consumer financial services firm Bankrate, that means someone who borrows $300,000 to buy a home today is paying $143 more each month than in November, when rates were closer to 3%.

“That definitely makes it more unaffordable,” Washington, DC-based real estate agent Roger Taylor told ABC News.

Rates are still low by historical standards; a 30-year fixed mortgage rate was close to 5% in mid-2018.

But Taylor said first-time home buyers already overwhelmed by sky-high home prices are trying to lock in a purchase now before rising rates push their monthly payments even higher.

“We saw that a lot of people started calling us in January because of these rate increases,” he said, adding that the typically busy spring housing market “came early.”

Real estate brokerage firm Redfin reported that 55% of homes under contract in the past month had an offer accepted within two weeks on the market. Taylor said many homes sell out within hours.

“That’s crazy,” he said. “Right now the inventory is really low and the competition is pretty strong.”

Intense competition is only making it harder for a generation of first-time buyers to gain a foothold in the housing market.

CJ Reaves, 34, moved from Virginia to Georgia when the pandemic hit and his job as a live digital operator slipped away, hoping to buy his first home.

“The houses have increased by at least 30 to 50 thousand [dollars]“Reaves told ABC News. “I want to be comfortable and not check live, I think I will move more to a cheaper area and so I can live comfortably.”

He is now looking for a home in North Carolina.

“I was supposed to go see a house, and I thought it would be the house,” he said. “Literally it was gone by the time I sent it to my real estate agent.”

Reaves added that he was watching closely how rising rates might affect his monthly payments if he was able to make an offer.

“You have to be careful with interest rates,” he says. “Or, you know, you might end up in a hole.”