This Is the Least Desirable Type of Home Right Now

Rising interest rates have cooled down much of the housing market. And one type of home has become the least desirable to prospective buyers: The fixer-upper.

A recent article from The Wall Street Journal said that homes needing renovations receive fewer offers and are low on home buyers' must-have list. The article noted that real estate agents say homes that need renovations sit on the market longer than those that don't need work. And it's one of the reasons homes currently for sale receive just three offers on average, compared to about six from a year ago.

So why are fixer-upper homes not getting any love from home buyers? It all comes down to cost.

It's expensive to renovate a house right now

It's no secret that mortgage rates have increased dramatically over the past few years. The current interest rate for a 30-year mortgage is 6.7%, compared to about 5.7% a year ago. That means if you buy a $350,000 house right now, with a 20% down payment, your monthly mortgage payment would be about $181 more per month than last year.

Higher monthly housing costs are likely keeping some home buyers away from purchasing a home that needs additional work. That's because the cost of renovation loans has also become more expensive.

The interest rates for renovation loans vary, but many are above 7%. And since the average cost of a single renovation project is $15,000, borrowing money for a renovation project over five years could add several hundred more dollars to your monthly expenses.

In addition to high interest rates, the rise in housing demand over the past few years has increased house prices. According to the U.S. Census Bureau data, the median sales price for a house in the first quarter of this year was $436,800, up 18% over the past two years.

Home buyers are shifting toward new homes

The rising cost of homes and the expense of renovating them has led some home buyers to seek out new construction homes. According to U.S. Census Bureau data, sales of existing homes were down 20% in May compared to a year ago. At the same time, sales of new homes were up 20%, per National Association of Realtors data.

Why the shift? Home builders are often able to offer discounts and incentives to buyers that traditional sellers may not be able to match. In May, more than half of home builders provided some sort of buyer incentive, like down payment assistance or a reduced interest rate, according to the National Homebuilders Association.

Home builders can offer lower mortgage interest rates through their own lending arms or through a lender partnership. This can sometimes mean a new construction buyer is paying an interest rate as low as 5% for their mortgage, compared to 7%.

If you're in the market for a home but aren't interested in new construction, make sure you shop around to find the best lender. And if you're considering buying a fixer-upper, make sure you know what you're getting into before you tackle your home renovations.