Are Rising Mortgage Rates Discouraging Buyers?
- Author: Jessica Williams
- Posted: 2024-07-12
Last week, the 30-year fixed mortgage rate hit its highest level in seven and a half years. Most experts expect it to rise and will peak around 5 percent in 2019. The good news is that the rate is still below the historic average of eight percent. Still, the higher rates have caused a debate about the housing market's response. Some say that they will continue to buy homes despite rising mortgage rates, but others see a silver lining.
Home prices have increased sharply in the last few years, driven by low mortgage rates and fierce demand. However, year-over-year gains have slowed, and home prices nationwide are now close to record highs. As of November 2020, home prices are up nearly 19 percent. As rates continue to rise and more homes hit the market, home prices are likely to rise. But that's only temporary. If rates continue to rise, they could be a big turnoff for homebuyers.
As a result of rising mortgage rates, fewer people are moving, and they have less money to spend on rent and utilities. That trend has also caused people to sell their homes fewer times. But that doesn't mean that people don't want to move if they are able to get a lower interest rate and lower monthly payment. In fact, the trend began long before the housing crisis. In the 2018-2019 season, 9.4% of U.S. households moved compared to 17.2% during the 1980s. Hence, it's difficult to pinpoint the role of rising mortgage rates.
Although there are no definitive reasons for why mortgage rates are rising, the recent trends indicate that the housing market is feeling the pinch from spiking rates. The average mortgage rate in the United States was at a record low just two years ago. This helped relieve the burden on homebuyers. Rising mortgage rates, however, are adding to the burden on buyers. As a result, the market is facing its biggest test yet.
While rising rates are discouraging buyers, the low interest rates that were prevalent during the housing bubble have also lowered prices. Interest rates have historically followed a similar trend as long-term bond yields. However, as inflation continues to rise, mortgage rates will follow suit. The 30-year fixed mortgage rate dipped below 8 percent in 1998, reflecting the robust economy and strong corporate capital investments. The result was an increase in productivity and the creation of new internet-based "Dot Com" businesses.
The Federal Reserve recently increased interest rates for credit cards, auto loans, and mortgages. This has caused mortgage applications to plummet and sales of previously occupied homes fell for five straight months. These trends indicate that the federal reserve is raising short-term interest rates to combat inflation. In addition, rising mortgage rates are discouraging homebuyers, as they make it harder to qualify for a loan. This means that many would-be homebuyers aren't looking to purchase a home this year.
