Will rising mortgage rates cool the housing market?

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As mortgage rates drift higher in the recovering post-pandemic economy, some prospective homebuyers are left wondering if the housing market is about to become less competitive. Low mortgage rates are just one factor that contributes to housing competition, and their incremental march upward is unlikely to ease the frenzy anytime soon.

Low mortgage rates are an unqualified good thing for homeowners looking to refinance, but for would-be homebuyers, the calculation is a little more complicated.

Today’s housing market is extremely competitive, and while low mortgage rates mean buyers have more borrowing power, housing prices are increasing at a record-setting pace these days. It all means that buyers can struggle to secure their dream properties, and may not benefit from those low rates as much as they would like to.

What’s going on with mortgage rates and real estate?

Housing prices are not determined by any single factor. The number of available homes for sale, mortgage rates and even construction material prices and availability for new homes all affect how much a property is worth at any given moment.

Right now in the U.S. the supply of available homes is especially low, meaning buyers are competing over fewer properties. Historically low mortgage rates, around 3 percent, are certainly helping buyers gain purchasing power, but most experts agree it’s the scarcity of available supply that’s really putting pressure on the market.

“The inventory issue, when you look at it, and the impact that it has on home price growth and median prices certainly is significant to say the least,” said Joel Kan associate vice president of economic and industry forecasting at the Mortgage Bankers Association. “We’re still at 2.3 months of housing supply on the existing side and the anecdotes are still that many many listed homes are getting not only many multiple offers, but multiple offers that are above the list price.”

The Federal Housing Finance Agency reported that the first quarter of 2021 saw the biggest annual increase in median home prices since the agency started tracking that data. Prices in the first quarter of this year were 12.6 percent higher than a year earlier.

How do mortgage rates affect the housing market?

Low mortgage rates do benefit buyers by allowing them to borrow more money more cheaply, but mortgage interest is rarely the most important factor when someone is considering buying a home.

“For most consumers the near-term concern is how much you’re having to pay in any given month,” Kan said, but added that the effect of low mortgage rates is often not the prime consideration. “Whatever the reason is for buying or moving, that typically matters more.”

Are lower rates contributing to the housing shortage?

Probably not, at least, not very significantly. The real problem is that builders just can’t make new homes fast enough to meet demand for a whole host of reasons.

“If rates are lower you can afford to bid up a little higher because it may not increase your monthly payment by too much,” he said. “That’s still a smaller factor than the fact that it’s so competitive.”

Will rising rates ease the demand for homes?

Most experts expect mortgage rates to rise slowly over the rest of this year, but they will still almost certainly close out 2021 at low levels by historical standards. That essentially means that even as mortgage rates edge up, only the most marginal — in other words, least qualified — buyers are likely to see any tangible effect on their ability to purchase a house.

“The demand hasn’t just been driven by lower rates, it’s been driven by the fact that we’ve had a lot of households who have gotten through the pandemic without their employment being disrupted, without a significant change in their income,” Kan said. “A small change on the margin can change your competitiveness in a sense, but it’s still just one piece of the picture.”

Prospective buyers, especially younger people looking for their first homes, are much more likely to be pushed out of the market by ballooning home prices than by upward-trending interest rates.

“The combination of higher rates plus increasing prices might price some people out of the market,” Kan said. “Younger buyers with a little bit less income, a little bit lower credit that are looking for these cheaper homes.”

Tips to compete in this seller’s market

If you’re looking to become a homeowner in the near future, you’ll want to prepare yourself for the extremely competitive market. Here are some things to keep in mind as you plan your shopping strategy.

  • Work with a local, knowledgeable agent. Someone who understands the market you’re interested in will help you identify the right properties in a limited pool.
  • Do your research. The more you know about where you’re looking to buy, the more realistic your expectations will be when you start to shop.
  • Be prepared to offer more than the asking price. Most homes on the market these days get multiple offers, so figuring out your budget and targeting homes that you can make attractive offers for will help you win out.
  • Consider waiving contingencies. You assume a little more risk when you do this, but if a home really feels like “the one,” your offer can be more attractive if it has fewer conditions for the seller to meet. A good agent will help you figure out what makes sense to write in.

Bottom line

The housing market seems unlikely to slow down in the near future. While rising rates may hurt some prospective buyers, higher home prices are likely to be the more difficult thing to contend with.

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
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