Americans looking to buy a home are facing pressure to act as soon as possible, as the era of rock-bottom mortgage rates that have sustained the nation’s housing market since the recession could be coming to an end.
For years, many homebuyers have enjoyed interest rates of under 4 percent, far lower than historic averages. But many analysts say that will change if the Federal Reserve begins pulling back its support for the American economy next month, as is widely expected.
An increase in the central bank’s benchmark rate is likely to result in rate raises for all sorts of loans, particularly mortgages.
Already, rates have crept higher in anticipation of Fed action, and that is forcing both buyers and sellers to re-evaluate their budgets and behaviors.
Average rates on 30-year fixed-rate mortgages have climbed in recent weeks by about a quarter-percentage point, from 3.75 percent to almost 4 percent — about a $600-a-year difference on a $350,000 mortgage.
Several sources of data suggest that buyers are paying more attention to the threat of higher rates.
The number of mortgage applications submitted this fall was about 20 percent higher compared with the same period a year ago, according to the Mortgage Bankers Association, an industry group. That could reflect the fact that more people are looking to buy even after the busy summer season.
The number of home tours requested in October by users of the real estate website Redfin increased 34 percent compared with the same time last year.
While some are moving more quickly to buy, others are feeling that the opportunity might have passed.
Kradak Thomas, a 43-year-old chemist living in Potomac, Md., said he and his wife had recently considered moving their family to Virginia for a shorter commute. But moving from their home, where they have been for seven years, would have meant giving up a 3.25 percent mortgage rate.
The higher rates now mean they would need to find a less expensive, potentially smaller home to keep their monthly mortgage payment about the same. So they have decided to stay put.
“You add all of those things up and say, ‘Well, what’s that going to do for us as a family?’ ” Thomas said.
Predicting how the housing market will respond to higher rates always involves some guesswork, and many factors can influence homebuying activity.
The last central bank hike was in 2006, and many in the industry have little experience working in a rising-rate environment. In addition, there is no precedent for increasing rates after such a long period at historically low levels.
“There is a level of urgency to consumers when they think — whether there is one or not — that there is a rising-rate environment,” said Katie Miller, vice president of mortgage lending at Navy Federal Credit Union.
The Mortgage Bankers Association expects that rates on 30-year loans could reach 4.8 percent by the end of next year, topping 5 percent in 2017. Rates haven’t been that high since the recession.
The Fed aimed trillions of dollars in stimulus at the housing market in the wake of the financial crisis, buying up mortgage-backed securities to help push rates to record lows.
But that is not the only factor influencing the direction of mortgage rates. Interest rates in the United States are being held back by uncertainty in the global economy and easy money in other countries.
(The Fed doesn’t control mortgage rates; it does manage a rate that banks use to charge one another for overnight loans, setting the baseline for all other activity.)
Realtor.com‘s analysis found that as many as 7 percent of people who applied for a mortgage during the first half of the year would have had trouble qualifying if rates rose by half a percentage point. Government regulations require lenders to consider potential buyers’ debt in comparison with their income.
Higher interest rates effectively mean that borrowers cannot spend as much on a home. Wells Fargo economist Mark Vitner said that could hamper the ability of all but the wealthiest borrowers to jump into the market.
“The lower end is having a hard time coming up with the down payment,” Vitner said. “The middle has seen very little increase in pay, and the upper end, they’re not as sensitive to interest-rate increases.”
Even when mortgage rates begin to rise, they are still likely to be low by historical standards. The Fed has tried to assure financial markets that it expects to increase its benchmark rate gradually over the next few years, allowing the economy plenty of time to digest the moves.
