Higher Mortgage Rates May Exacerbate Already White-Hot Housing Market

You’ve seen the headlines – mortgage rates have jumped from recent all-time lows. And they’re seemingly on an upward spiral that can’t be stopped.

Except, they’ve actually seen some improvement over the past few days, thanks in part to the recent stock market rout, coupled with an easing in the 10-year bond yield.

Still, the 30-year fixed is pricing about .50% higher than it did at the start of 2021, when it was closer to 2.65%.

Today, your quoted rate might be closer to 3%, though some lenders are back to offering sub-3% rates too with limited or no lender fees.

Higher Mortgage Rates May Just Make Matters Worse

• There’s already a record low supply of homes for sale
• And intense bidding wars are becoming all too common these days
• The threat of even higher mortgage rates may just compel more buyers to enter the fray
• That could result in even higher home prices as more buyers clamor over what’s out there

Let’s face it, there aren’t many available homes on the market at the moment. This has been the case for a while now, and hasn’t improved one bit lately.

Meanwhile, home prices are on a tear and record home purchase activity is expected in 2021 despite higher rates.

The median home price has already increased 17% year over year to $330,250, an all-time high, per Redfin.

That also happens to be the biggest increase on record, which goes back through 2016.

On top of that, asking prices of newly-listed properties hit an all-time high of $350,972, up 10% from the same period a year ago.

Oh, and new listings haven fallen 17% from a year earlier. Good luck.

In other words, if you thought homes were expensive last year, don’t look now! And if you thought competition was intense in 2020, well, hmm…yeah.

The good news is mortgage rates are still lower today than they were a year ago, with the 30-year fixed averaging 3.17% at last glance, down from 3.50% during the same week in 2020.

The bad news is that the threat of increasing rates may actually be pushing more prospective buyers off the fence and into the mix.

If more folks think the end of the low mortgage rate era is upon us, they might finally take action.

In the past when this type of thing has happened, the housing market has held up just fine.

Don’t buy into the idea that home prices and mortgage rates have an inverse relationship. In many cases, both can rise or fall in tandem.

Ultimately, you want to pay attention to the economy to determine the direction of the mortgage rates, not home prices.

What Happens When Mortgage Rates Go Higher?

• Home prices may also increase because there’s no inverse relationship
• Bidding wars may become even more intense as urgency rises among buyers
• Mortgage lenders may loosen underwriting guidelines to facilitate home sales
• Home builders may build smaller homes and/or cheaper ones to maintain some sense of affordability

If and when mortgage rates do increase, and actually stay elevated for a sustained period of time, a variety of things may happen.

For one, home prices may increase, for a couple different reasons. For one, there will be more urgency to lock in that low mortgage rate before they worsen even further.

Compounding that will be even more bidders on each home out there, which will further drive up the final sales price.

Additionally, higher interest rates are a sign of an improving economy, so if things are looking up, so too might home prices.

At the same time, mortgage lenders may ease up and loosen underwriting guidelines to ensure borrowers can obtain a home loan.

And home builders may take notice and make adjustments to the new homes they build by making them smaller and/or cheaper.

They might also ramp up their volume to satisfy the intense demand from prospective buyers. This is usually where things go wrong and we overshoot the mark.

Why It Might Be Good to Wait for a Pullback

While there’s a sense mortgage rates may never revisit their recent all-time lows, it’s also foolish to believe that.

Why can’t they go back to where they were just a few months ago? I liken it to the stock market, where human psychology plays a big role.

One day, stocks are flying high and everyone is piling in. The next day, it’s doom and gloom and everyone’s thinking about selling.

This mentality is exactly how/why many retail investors get burned, assuming they attempt to time the market.

With the recent rise in mortgage rates, you might think it’s best just to accept the higher rate before things get even worse.

And while that’s not imprudent, it’s time like these where we often see reversals. When all hope is gone, things suddenly improve.

Of course, this won’t do the hot housing market any favors. Either way, it’s not going to get any easier to submit a winning bid on a home, whether mortgage rates go up or down.

Read more: 2021 Home Buying Tips to Help You Win