Home Buyers Are More Worried About Rising Mortgage Rates than Prices

July 10, 2013 No Comments »
Home Buyers Are More Worried About Rising Mortgage Rates than Prices

A new survey from Trulia revealed that rising mortgage rates are the chief concern among those who plan to buy a home sometime in the future.

The company polled 2,000 people in late June after the uptick in mortgage rates, and found that 41% said their biggest worry was mortgage rates rising before they closed on their home purchase.

Amazingly, it beat out of the next biggest concern, which was rising home prices. Only 37% of respondents listed that as their number one issue, which tells you how important low mortgage rates are to consumers these days.

The third biggest concern for prospective buyers was simply finding a suitable property to purchase, seeing that inventory is so poor at the moment.

13% Believe a Mortgage Rate at 4% Is Already Too Expensive

Perhaps the Fed went too far in its quest to push mortgage rates lower, as it seems to have led to a major distortion of reality.

In fact, 13% of those surveyed by Trulia indicated that a 4% mortgage rate was enough to discourage a home purchase. Talk about being bearish on housing…

For the record, mortgage rates on the 30-year fixed are already around 4.5% or higher, so we know some would-be buyers are apparently out already.

And another fifth of respondents said a 5% mortgage rate would push them out of the game, or at least discourage them.

If rates were to rise to 6%, another 22% said they’d be discouraged to buy a home.

Taken together, more than half of those surveyed (56%) would be lukewarm about a home purchase if rates shot up to 6%, which is a historically low rate and more than realistic over the next several years.

After all, rates hovered around that level for much of the 2000s, so returning to 6% wouldn’t be all that unheard of.

For renters who plan to buy a home eventually, 62% said they’d be discouraged if rates hit 6%.

Talk about spoiling consumers with super low mortgage rates.

[Check out mortgage payments at different rates.]

Did the Low Mortgage Rates Create a False Recovery?

As far as I’m concerned, this calls into question the validity of the supposed housing recovery we’ve all been so convinced about lately.

Yes, housing has improved on a number of fronts, with both distressed and non-distressed inventory down considerably, and mortgage delinquencies lower.

But do we only have the artificially low mortgage rates to thank for that? Did the low rates alone convince more homeowners to stay put, as opposed to walk away? And did they push more would-be buyers to scoop up homes when housing was completely unfashionable?

I hate to say it, but without mortgage rates on the clearance rack, this housing recovery may have never taken flight.

As others have noted, home prices relative to income are still historically high, meaning it is only the low mortgage rates that making housing affordable today.

And if rates rise back to historical norms, monthly mortgage payments wouldn’t be cheap compared to renting in many markets.

Sure, they’d have to rise to 7% to make the median home unaffordable, per Freddie Mac, but that doesn’t mean it would make sense to buy a home. And most hot markets are already unaffordable, even with the low rates.

Unfortunately, home prices have already shot back to recent highs in a lot of markets, so if rates also continue to rise, things won’t be so rosy anymore.

Perhaps we’re looking at a major housing cool-down over the next few years, now that the low rate party is over, and prices aren’t nearly as cheap as they once were.

So if you can come to terms with less-than-stellar home price appreciation, maybe that new home is for you. Just don’t buy with the sole expectation of exponential home price gains. They may have already come and gone.

Read more: Home prices vs. mortgage rates

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