Will rising interest rates stifle homebuying?

by Ryan Smith24 Feb 2017
The majority of prospective homebuyers are worried about low inventory and rising interest rates impacting their ability to purchase a home, according to new data from Zillow. 

Mortgage rates increased last year following the presidential election and December’s federal funds rate hike. With more hikes expected on the horizon, rising rates may stifle homebuying ability, Zillow said.

Low inventory is still homebuyers’ number-one concern, with 65% saying they worried about their ability to find an affordable home. However, rising interest rates were in second place, with 53% concerned that interest rates could prevent them from buying. When Zillow conducted the same survey in 2015, interest rates ranked behind worries about both finding an affordable home and saving for a down payment.

It’s not all bad news, however. According to Zillow, plans to purchase won’t be immediately impacted by rate hikes. Eighty-three percent of people planning to buy a home in the next three years said they’d go ahead with their plans even if rate rises increased their monthly payment by $100. And 49% said they’d still purchase a home even if rate hikes upped their payments by $200 per month.

However, as rate hikes continue to increase monthly payments, buyers will start to shy away. A quarter of prospective homebuyers said they would reconsider the type of home they were looking for if their monthly payment were to increase by $100. Another 38% would revise their homebuying budget if rates were to rise by $200.

“For years, falling interest rates have been a boon to the US housing market, keeping monthly mortgage payments low for first-time and move-up buyers alike, even as home values rose,” said Erin Lantz, Zillow Group’s vice president of mortgages. “As rates rise this year, first-time homebuyers and those looking to buy in expensive markets where affordability is already an issue will feel the pinch of higher rates on their budget. That said, for most borrowers, there is quite a bit of head room for rates to rise before homebuying becomes unaffordable.”

In the event of a mortgage-rate hike, the hardest-hit buyers will be those living in already-expensive markets. In pricey markets like San Francisco or San Jose, a rate hike to 5% could mean increases of$400 or more in monthly payments, Zillow said.


 

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