Many of them say they won’t. And they can’t.
It’s called sticker shock: you look at something that you very rarely buy, and when you see how much it would set you back, you go into shock. This is what is happening with mortgage rates when potential homebuyers figure how much the monthly payment would be for a given house.
On Friday, lenders quoted conventional 30-year fixed-rate mortgages between 4.375% and 4.5% for prime borrowers. While that’s still historically low, it’s up well over half a percentage point over the last four weeks, the highest since April 2014, and up over a full percentage point from many low points during this period.
Home prices have soared in recent years, in part due to historically low mortgage rates. But today’s higher mortgage rates make those homes a lot more expensive in terms of the monthly payment, at a time when home “affordability” in many cities is already a huge issue for what remains of the middle class.
The industry hopes fervently these higher rates will cause a burst of home-buying, as people try to lock in whatever rate they can get before it rises even more. This happened before when rates jumped, for example during the times when QE was ending before a replacement was hurriedly announced, or during the Taper Tantrum in the summer of 2014.
But each time, people have learned that mortgage rates would fall again to even lower levels than before, and that they didn’t have to rush and could have waited, and this lesson might carry forward now, with potential buyers hoping for rates to fall to new lows once again. But time, rates might only back off a little, without hitting new lows, or without even falling a significant amount – because this time, the dynamics have changed.
How homebuyers might react to higher rates is something everyone wants to know. There are those hoping for a burst in home-buying activity. Others in the industry say that it won’t be a big deal; after the sticker shock blows over, people will get used to paying more, and they’ll stretch even further to buy that home.
But here are the people who are supposed to get used to paying more, in a survey by real estate broker Redfin conducted in 38 states and Washington D.C. These are active homebuyers who used Redfin.com in their home-buying process and were either looking to buy over the next 12 months or were already under contract. Their responses are not propitious for home sales, and ultimately home prices.
To the question how important mortgage rates were in their decision to buy, over two-thirds of the respondents – they’re all active homebuyers, so it’s not a theoretical question – said either “very important” or “important”:
- Very important: 34.5%
- Important: 33.4%
- Somewhat important: 20.7%
- Not important: 11.4%
And if mortgage rates increased by a point or more, “how would it affect your decision to buy?” This is what the respondents said at the time:
- I’d give up for now: 7.5%
- I’d look for a less-expensive house: 46.0%
- I’d save for a larger down-payment: 18.0%
- It wouldn’t change anything, I’m not sensitive to rates 28.5%
So only 28.5% of the potential homebuyers would not be impacted by higher rates. The rest would act in a manner that would let the hot air out of the market.
Over 25% would either “give up for now” or save for a larger down-payment, which could take years. They’d just disappear from the market.
The survey, released in December, was conducted between November 7 and 11, on both sides of Election Day. The mortgage rate mayhem started on November 9 but when it did show up in the mainstream media days later, it was buried under the much more fascinating post-election drama. So few respondents would have been aware of it at the time they responded. But since then, mortgage rates have jumped and are now closing in on that one-point increase that the question proposed.
The report tried to reflect the industry’s optimism in face of uncertainty, or rather in face of the potential nightmare of higher rates at the peak of Housing Bubble 2, which has blown past – in many cities, by a fat margin – the original Housing Bubble that had imploded with such spectacular results. Redfin:
“Most buyers are looking for a home because of their personal economy, such as an expanding or shrinking family, or a job relocation, rather than only because of the broader economy,” said Redfin real estate agent Danielle Field in Louisville. “Yes, a few people will be kept from the market because of interest rates, but for many people moving homes just isn’t something you can time to the market like the buying or selling of a stock.”
There is some truth to that. People want to move on with their lives. But reality is this: when sky-high home prices that are barely affordable for many buyers even at super-low mortgage rates meet surging mortgage rates, something has to give.
And this time, it might not be mortgage rates. Because the dynamics have changed. Even Fed doves are making unpleasant noises about long-term rates! This could get interesting. Read… Trump Talked, the Fed Listened: Let’s Shrink the Balance Sheet, Bullard Says