Rising Rates Pressure Buyers

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Market Trends

House hunters are watching mortgage rates closely. After all, every increase could have an impact on affordability, particularly given escalating home prices.

Nearly half—47%—of home buyers recently surveyed say they would feel more pressure to buy a home if mortgage rates passed 3.5%, according to a new consumer survey conducted by Redfin.

Mortgage rates have taken a big leap at the start of the new year. In the first week of 2022, the 30-year fixed-rate mortgage jumped nearly 60 basis points higher than a year earlier, averaging 3.22% this week, Freddie Mac reports. 

“Mortgage rates increased during the first week of 2022 to the highest level since May 2020 and are more than half a percent higher than January 2021,” says Sam Khater, Freddie Mac’s chief economist. “With higher inflation, promising economic growth, and a tight labor market, we expect rates will continue to rise. The impact of higher rates on purchase demand remains modest so far given the current first-time home buyer growth.”   The National Association of REALTORS® forecasts that mortgage rates will average 3.7% by the end of this year.

Buyers who were surveyed say that increases in mortgage rates would also have an impact on the type of home they decide to purchase. Twenty-nine percent of buyers say that if mortgage rates increase above 3.5%, they will change their target areas to buy a home and seek a smaller one.

Only 7% of the 1,500 home buyers surveyed say they wouldn’t change their plans at all if mortgage rates rise above 3.5%, the Redfin survey shows. Only 2% would cancel their plans to purchase a home altogether if rates increase past that amount.

“Mortgage rates increasing will make homebuying less affordable,” says Daryl Fairweather, Redfin’s chief economist. “Over time, that will put the brakes on demand and put an end to double-digit annual price growth. But in the short term, this increase will light a fire under home buyers and make for an extremely competitive January.”

 

A line graph showing the change in people's ability to afford a home as mortgage rates increase

 

Bottom Line

It’s important to know how interest rates will affect not only the type of home to purchase but also your monthly mortgage payments. Should you need additional clarification, reach out to us for a chat to explore the possibilities, so you can make an informed decision about your next move.