A Fed rate hike will make buying a home even more expensive

This week’s Fed rate hike will make it harder to buy a house, because higher interest rates will raise mortgage rates. It’s not great news for mortgage demand, which has already been cratering: Mortgage applications are down 19% since last year, according to Realtor.com.

Two things dictate how much it costs every month to own a home: The cost of the home itself, and the cost of borrowing the money to buy it. The first has been a problem for a while, said Bankrate analyst Jeff Ostrowski.

“Home prices remain at record levels, and so home prices are really pushing the outer bounds of affordability,” he said.

That’s a classic supply-and-demand issue.

“There just aren't a whole lot of existing homes on the market. And that that small supply of homes for sale is being competed over by buyers who are willing to to bid up,” Ostrowski said.

While that’s been happening, interest rates have also gone up. Lenders are asking for more return on their money because they’re spooked by the effects of the war in the Middle East.

“Oil has spiked … and then that's all coupled with inflation levels,” said John Hummel, head of home lending at US Bank. He said as long as those factors stick around, housing is not going to get any more affordable.

And more would-be homebuyers are just going to stay on the sidelines.

“Once rates hit 7% I think home buyers are reticent to put it in an application and to shop for a home,” said Jessica Lautz, deputy chief economist with the National Association of Realtors.

She said while the monthly payment doesn’t change much, there’s something about the psychology of cresting another round number that makes buyers stop buying.

“When you hit seven percent versus 6.8, where rates have been, is only a difference of less than $50 [per month] on the median-priced home with a 20% down payment. But it's a change in mindset,” Lautz said.

Seven percent might feel high, but for some context, the historical average since the early ‘70s is 7.74%.