Housely
Interest rates on 30-year mortgages have been seeing a sustained rise ever since Donald Trump was elected as the next President of the United States, with the result that it surpassed 4 percent in November and December. This is something that can be attributed to a number of reasons. For example, people believe that the combination of a Republican President and a Republican Congress will lead to increased spending from the federal government, thus resulting in a bigger budget deficit and thus higher interest rates. Furthermore, people believe that the increased spending will lead to increased inflation, which in turn, will lead to higher interest rates to keep up the same real as opposed to nominal rate of return.
Finally, it should be noted that the Federal Reserve is expected to raise its interest rate on reserves in December, which has a tenuous relationship with mortgage rates based on historical evidence but nonetheless signals confidence in the strength of the U.S. economy, thus sending all interest rates shooting upwards. Summed up, the recent rise in U.S. mortgage rates is based on forces that can be expected to remain for some time, meaning that home buyers can expect it to be the new normal state of things rather than a short-lived phenomenon before a prompt restoration to previous levels.
How Are Home Buyers Reacting?
With that said, it is important to note that home buyers have not responded to this change in the state of things to a significant extent. Something that can be seen in the results of a recent Redfin survey conducted on people who have either bought a home or are planning to buy a home.
In brief, most home buyers seem to consider mortgage rates to be an important factor in the home buying process. After all, 34.5 percent of them responded that they were “Very important,” 33.4 percent of them responded that they were “Important,” and 20.7 percent of them responded that they were “Somewhat important,” meaning that no more than 11.4 percent of them considered mortgage rates to be “Not important.” However, the survey went on to reveal that a smaller percentage of home buyers would let a 1 percent increase in mortgage rates affect their home buying decision, seeing as how no more than 7.5 percent of them said that they would give up if that happened.
In contrast, 46 percent of them said that they would look for a less expensive home while 18 percent of them said that they would save up for a bigger down payment, meaning that 28.5 percent of them outright stated that such an occurrence would not change their home buying plans whatsoever. Summed up, it is clear that while mortgage rates matter, they do not matter enough at this particular percentage rate and at this particular point in time to exert decisive influence over home buyers.
Why Are Home Buyers Reacting In This Manner?
To be fair, these are not particularly shocking results. First, it is important to note that while mortgage rates have been seeing a sustained rise for week after week, they are actually around the same level as their counterparts at around the same time in 2015 because of how they fell in the earlier part of 2016. For that matter, current mortgage rates are not that far from the record low of 3.36 percent, meaning that while they are rising, they remain more affordable than usual in the grand scheme of things. As a result, it is no wonder that most home buyers do not seem to be too bothered by what has been happening.
Second, it should be noted that the home buying process is not as flexible as it seems to be. After all, most people do not buy their homes when they feel that market conditions are favourable for them. Instead, they buy their homes when something causes them to seek out more living space, whether because they are moving to a new place or because their family is changing in size. As a result, while home buyers will let changes in mortgage rates affect the size of the home that they want to buy, they will not let it affect the fact that they are going to buy a home. Something that can be seen in the responses of the Redfin survey.
Final Thoughts
However, it must be noted that it is still too soon to tell what the consequences will be in the long run. Although home buyers are not letting the sustained rise in mortgage rates change their home buying decisions too much for the time being, that is not the same as saying that they will never do so. Should mortgage rates continue to rise more and more for the foreseeable future, more and more home buyers will be priced out of the market altogether instead of being forced to settle for something less than what they had been hoping for, meaning that it is not impossible for home buyers to start changing their minds further down the road.
Furthermore, it is interesting to note that there is the potential for a short-term rise in the number of home buyers out there because of the sustained rise in mortgage rates. After all, if people want to buy a home and expect mortgage rates to rise in the future, there is more pressure on them to make the purchase sooner rather than later in order to lock in the current mortgage rates, which is a choice that can save them hundreds and in some cases, even thousands of dollars over the entire existence of their mortgages. As a result, should this trend continue, it is not impossible that people will rush to buy homes even if they feel that they are not as ready as they should be in order to capitalize upon the opportunities presented to them before said opportunities slip through their fingers. In the end, the future remains to be seen, but whatever shape it will take, it promises to be an interesting one.
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