Home Buyers: Rising Interest Rates Top Concern

More than half of current home shoppers say affordability and rising interest rates are top concerns that could influence their ability to purchase a home, reported Zillow Group Mortgages, Seattle.

Respondents currently in the process of searching for or buying a home said they are most concerned about finding an affordable home amidst low inventory (65 percent), followed by concerns over rising interest rates (53 percent). A year ago, the survey reported rising mortgage rates (50 percent) ranked lower among top concerns for home buyers, falling behind both finding an affordable home (73 percent) and saving for a down payment (59 percent).

Since then, mortgage rates increased following the U.S. presidential election and federal funds rate hike in December. The Mortgage Bankers Association this week reported the 30-year fixed rate for conforming loans at 4.30 percent, 51 basis points higher than a year ago. With the Federal Open Market Committee expected to raise the federal funds rate at least twice more this year, rising rates are coming into play for the first time in years.

Despite these concerns, the survey reported plans to purchase won’t be impacted–at least initially. Most people (83 percent) planning to buy within the next three years will continue with their plans even if rates increase their monthly mortgage payment by $100. Nearly half (49 percent) of home shoppers said they would move forward with a home purchase even if rising rates were to increase their monthly payments by at least $200.

However, the survey reported as rates rise and monthly payments for homes increase, buyers’ budgets will be more strained. A quarter of home shoppers said they would reconsider the type of home they are searching for, such as looking for a smaller home or less expensive community, should their monthly payment increase by up to $100 (25 percent). Should monthly payments increase up to $200, another 38 percent of home shoppers would change the budget of the home they are searching for.

“For years, falling interest rates have been a boon to the U.S. housing market, keeping monthly mortgage payments low for first-time and move-up buyers alike, even as home values rose,” said Erin Lantz, vice president of mortgages for Zillow Group. “As rates rise this year, first-time buyers 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 home-buying becomes unaffordable.”

Zillow noted for the typical homebuyer shopping for the median U.S. home, valued at $195,300, an increase in mortgage rates from 4 percent to 4.25 percent would increase their monthly mortgage payment by $23. Across the U.S., only four of the largest 35 metros would see monthly mortgage payments rise by more than $100 should rate hit 4.5 percent. If rates rise to 5.0 percent, 19 of the largest 35 metros would see monthly payments on the median home rise by $100 or more.

Zillow said buyers that could be hit the hardest by a rate increase would be those living in metros where housing is expensive. In markets such as San Francisco or San Jose, monthly mortgage payments could increase by $400 or more if mortgage rates rise to 5.0 percent.