5 Ways Homebuyers Will React to 5% Mortgage Rates

5 Ways Homebuyers Will React to 5% Mortgage Rates 956x538 blog


  1. Adjust the criteria
  2. Pick up the pace
  3. Slow things down
  4. Call it quits
  5. Stay the course

[Edited transcript]

1. Adjust the criteria

Janice:             Number one would be adjust the criteria. They say about 21% of consumers said they would look into other areas or purchase a smaller home because of the rising rates, which is an increase from 18% of people a year ago. It did rise 3% that they would look into a smaller home if the rates went up.

Anthony:            That just seems common sensical. If prices go up, you can afford less. I don’t see … Sorry to be so snarky about it, but that seems kind of obvious.

Janice:             Absolutely. I totally agree with you. When your interest rate is higher, your monthly payments will be higher, everything is higher, so you might have to scale back a little bit.

Anthony:            Yeah. Folks, a lot of new buyers … I’m sorry. Let me just jump in and … These are really topics that I cover in my book, “How to Buy Your Perfect First Home”, available on Amazon. A lot of folks come in thinking, “I can afford a house that costs this much, $100,000, $300,000, $500,000”, these sort of absolute dollar amounts for the purchase price of the house, but that’s not really the number you should be looking at. You really need to be thinking about, “What can I afford per month?” The reason for that is because that’s what the mortgage company … Unless they’re buying all cash, that number is what the mortgage company cares a lot about and looks at your credit history, your income, and all that to help you determine. When interest rates go up, meaning the amount you’ll be paying per month on your mortgage, that kind of changes all the numbers there.

Janice:             Absolutely. That monthly payment is so important when you go in.

2. Pick up the pace

Janice:             About 19% of home buyers said they would increase the urgency of their home search in order to purchase before the rates rise, which I guess, again, makes sense, but home buying isn’t a quick process. They would say they would get out there a little bit quicker, 2% down … It’s down 2% from a year ago, those statistics. They’re going to get out there a lot quicker, try to do it faster, before they go up.

Anthony:            To me, this feels like trying to be a market timer, if you’re familiar with that term from stock investing.

Janice:             That I’m not.

Anthony:            It’s when you think you can buy low and sell high because somehow you know when the stock will go up and go down. Here’s the spoiler. Most people can’t, or almost nobody can, predict.

Janice:             Right.

Anthony:            Similarly, this article was written in June with the idea that it would increase to 5% at the very least by the end of the year. That hasn’t happened. That’s just sort of an indication that it’s very hard to predict. Picking up the pace to try to time the mortgage interest rate market seems unlikely to be accurate. Just go at whatever pace seems to fit your life, I would suggest generally.

3. Slow things down

Janice:             As you just said, this was written in June. Those that slowed it down, they did alright because it’s still not up to 5%. It says here that 23% of house shoppers would slow down their search to see if it would cool off, which is up from 29% the prior year. Just like you said, they flip side, they played a different angle. They waited. They’re still good.

Anthony:            Yeah. Again, that totally exemplifies that it’s just so hard to predict. Just go with what suits your kids’ needs, your family needs, your budget needs, your job might be changing, whatever fits your life best probably.

4. Call it quits

Janice:             A small share, just 5%, claim they would halt their home buying process altogether if the mortgage rates rose above 5%. I believe that’s what we were just talking about, where it’s still kind of a gamble because they could still go up. If they wanted to buy a home, maybe it’s a good time, maybe not, but 5% said they’d pull out and they would not.

Anthony:            Can you clear that up for me, Janice? Does that article mean that over 5%, certain people would just pull out of the market because of a theoretical objection to paying over 5% for a mortgage or it’s too expensive? What’s the reason behind that?

Janice:             That’s a good question. It says exactly that, “A small share of house hunters, just 5%, claimed they would halt their home buying process altogether if mortgage rates rose above 5%.”

Anthony:            So it doesn’t explain the reasons why.

Janice:             It doesn’t. We have to interpret it a little bit. My interpretation would be that those 5% would just stop altogether, but this does lead us to a little bit of interpretation because we don’t know the actual answer.

Anthony:            If it’s because of a theoretical objection to ever paying more than 5% on a mortgage, I think … Janice, I don’t know if you’ve had this perspective. I remember in the mid-80s when inflation was quite high, you could see mortgages for like 15% or 17%.

Janice:             Yeah.

Anthony:            On the flip side, your bank account … What do you get these days on your savings, Janice? 1%? 2%

Janice:             Barely, barely, I think. I think the-

Anthony:            Back then, you were getting like 8%, 9% on your checking account.

Janice:             Right.

Anthony:            Just have a longer view of just life.

Janice:             A longer view, a broader view. Like you said, take into account the percentages on your investments and checkings and savings accounts.

Anthony:            Who knows? A decade from now, people might think back wistfully of the days they could get a 5% rate.

Janice:             Right, right.

Anthony:            You never know.

Janice:             They’ll say, “I heard them talk about once this 5% rate. What is that? Because it’s really high now.”

Anthony:            Drawing those lines in the sand, I don’t know if that’s productive.

Janice:             No. I think it goes back to what you said. Do what’s right for you, for your family, for your financial situation. If 5% works, great. If it doesn’t work and you have to wait, great. But you probably shouldn’t base it on that particular percentage point at the time.

Anthony:            Now that being said, if the respondents have calculated that, at 5%, they simply can’t afford a house that they would want to buy, that makes sense too.

Janice:             Absolutely.

5. Stay the course

Janice:             24% of home buyers said that mortgage rates hitting 5% wouldn’t impact their home search. There are still 24% of people from this survey of 2,000, 4,000 sorry, that said they’re just going to stay on track.

Anthony:            To me, that’s quite reassuring that a good chunk of people are just doing what they need to do. They’re not being, what do you call it? They’re not letting the mortgage rate tail wag the hound by the dog? I kind of butchered that.

Janice:             But I think I know what you’re saying, yes. Exactly. They’re just staying on course. They’re doing what’s right for them, I’m assuming. I’m interpreting here that they’re just doing what’s right. They’re staying on their course. They have a plan. They’re going with it.



Original post by Elina Tarkazikis (@ElinaTark, on LinkedIn)

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