Photo: Christopher Mooney/Flickr
Most US homebuyers are concerned about rising interest rates and how they might affect housing affordability, according to a new Zillow survey.
While they have remained at historic lows in recent years, national mortgage interest rates began to rise following the presidential election in November. A federal-funds rate hike in December — as well as the probability of further Fed hikes this year — have also caused concern for homebuyers.
Finding an affordable home when the national inventory is severely tight was the top concern of homebuyers surveyed. According to the online-listing site, 63 percent of respondents felt they might not be able to find a home they could afford given the current state of the country’s housing inventory.
Some 53 percent of respondents were concerned about how rising interest rates might affect affordability. In 2005, 50 percent of respondents were concerned about rising mortgage rates. In fact, interest rates ranked below finding an affordable home and saving for a down payment as top concerns of homebuyers, says Zillow.
However, 83 percent of respondents planning to purchase a home in the next three years still plan to buy even if rising interest rates push their monthly mortgage payments up by $100. And nearly half of respondents said they would still buy a home if their monthly payment increased by “at least” $200.
Although most respondents said they would still buy despite higher monthly payments, 25 percent would reconsider the type of home they were looking for if their payment increases up to $100 due to rising interest rates. That share jumps to 38 percent when the monthly payment climbs an additional $200 per month.
“Rising rates and nominal home price growth are outpacing the influence of strong income growth, leading to declining affordability for first-time home buyers. However, housing remains as affordable as it was in late 2009, says Mark Fleming, chief economist at First American, a major US financial-services company, in a digital release. In December, increasing mortgage rates led to a dip in housing affordability, he adds.
An increase in the mortgage rate from 4 percent to 4.25 percent, would cost the typical American homebuyer an additional $23 per month on a median valued home, currently $195,300.
In fact, only 4 of the largest US metros examined by Zillow would see monthly payments rise by over $100 if rates rose to 4.5 percent. However, should mortgage rates rise to 5 percent, then 19 of the largest metros would see an increase of $100 per month or more on monthly payments on a median priced home.
For example, in the New York metro area the median home value is currently $404,800, according to Zillow data. At 4 percent interest, the monthly payment is $1,546, but rises nearly $200 to $1,738 when the interest rate rises to 5 percent.
“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, vice president of mortgages for Zillow Group Erin Lantz.
First-time buyers in expensive markets, where affordability is already an issue, will feel the effects of the rising rates the hardest. But for most borrowers, there is quite a bit of headroom for rates to rise before home-buying becomes unaffordable, Lantz added.
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