Rising Interest Rates Squeeze Homeowners’ Budgets
Higher mortgage rates combined with rising home prices and the loss of tax breaks for some homeowners are having a damping effect on the housing market. New-home sales and pending home sales slumped in January and February. High-end homeowners are shelling out $241 more per month, on average, toward their mortgage payments, up 13% from 2017.
As the spring homebuying season ramps up, Lawrence Yun, NAR chief economist, says rising rates will affect both buyers and sellers. Sellers, especially those who recently refinanced, are less likely to put their homes on the market while rates are rising. If this happens, then inventory will be even further squeezed in many markets, making it harder for eager buyers to find homes at many price points.
“The expanding economy and healthy job market are generating sizable homebuyer demand, but the minuscule number of listings on the market and its adverse effect on affordability are squeezing buyers and suppressing overall activity,” Yun said in a statement.
For prospective homebuyers, rising rates might put some pressure on finding a home sooner than later, as rates are unlikely to get better than they are now. According to a recent survey by Redfin, 21% of respondents said rates passing 5% would increase the urgency to buy a home, 27% said they’d slow their search to see if rates come back down, and just 6% said they’d cancel their search for a home altogether because of rising rates.
And for further historical context of the rate itself, even a dramatic rate increase wouldn’t put it near all-time highs. It’s hard to imagine now, but in the early 1980s, the fixed 30-year mortgage rate was about 18%. By the 1990s, it fell to about 10% and has steadily fallen ever since.
“If you look at the relationship between mortgage rates and home sales and home prices, the relationship is almost zero,” said Sam Khater, deputy chief economist at CoreLogic. “That’s shocking to most people. Even real estate people and finance people, they don’t understand that.”
What one can do today; If buying a house, consider an adjustable rate mortgage (ARM) with a fixed rate for five years. ARMs have been out of favor, but now are one percentage point less than a 30-year fixed loan. Be aware, the rate can rise in five years.
It’s important to put down as much money as possible. The less you have to finance, the lower your mortgage payments will be. It’s also important to work on boosting your credit score. It doesn’t have to be perfect. But homebuyers with higher credit scores have a better shot at landing the lowest interest rates.
