Most people know that when mortgage interest rates rise, so too do monthly mortgage payments. This is a pretty obvious cause and effect phenomenon. Less obvious are changes to the way homeowners and home buyers perceive the value of real estate ownership and the impact of those perceptions on buying and selling behaviors. What to expect when interest rates rise can vary among current homeowners, previous home buyers and first-time home buyers.
When interest rates go up, current homeowners are more likely to stay put when their existing mortgage interest rate is lower than the current market rate. Rather than sell their current home to find a new home with desired features or more space, they’re more likely to work with what they already have and invest in renovations and upgrades instead. When more current homeowners stay put, the result is less inventory available for buyers. Lower available inventory often pushes up home values as well. Current homeowners are also less likely to refinance because many have a fixed-rate mortgage with a lower interest rate than they’d get by refinancing.
Previous homebuyers who are planning on traditional financing options with a 20% down payment will have to save up a bit longer as home values typically rise when market inventory is low. However, with less current homeowners refinancing and an overall lower number of homebuyers in the market, mortgage lenders may loosen requirements to keep new mortgage applications coming in, making it slightly easier for buyers without perfect credit to qualify for a home loan.
First-time homebuyers are more likely to be scared away from buying a home as a result of rising interest rates. In fact, the number of first-time homebuyers has dropped by 10% or more in many markets after the rates began to increase in the fall of 2016. Industry experts expect the number of first-time buyers to continue to decrease as rates have inched slightly upward so far in 2017 and more increases are expected. Even small increases in mortgage interest rates can tip the affordability scale for first-times buyers, putting home ownership just out of reach.
When mortgage interest rates rise, it creates a ripple effect across the real estate market. In the current economic environment, even slight rate increases can be significant enough to leave many aspiring home buyers out in the cold. While some potential good news exists for buyers going the traditional loan route, overall, higher rates create a tighter and more expensive market. Let James Haas find the right home for you and a mortgage lender with competitive and creative solutions.