The super sensitivity of home buyers to the slightest uptick in mortgage interest rates is one of the more puzzling examples of human misperception. Buyers will rush to close or put their buying plans on ice when rates are rising a wrinkle, even if the actual monthly impact on a mortgage is less than a dinner out at McDonald’s. They will worry more over the Fed’s next rate hike than the extra interest they are paying because they have less than ideal credit scores, a condition they can improve by taking a few simple steps
So eyebrows rose when Zillow Mortgage reported that applications for purchase loans stayed steady despite soaring rates in October. Per mortgage rates on Zillow, the average 30-year fixed conforming mortgage rate has jumped 55 basis points since the presidential vote, to 3.91 percent, and today is holding near the highest rates recorded since early 2015.
“While those looking to buy a home are understandably concerned about the path of rates ahead, it is important to remember that borrowing costs remain exceptionally low by historical standards,” said Erin Lantz, vice president of mortgages for Zillow Group. “Rising rates may impact the location or size of the home they hope to purchase, but buyers that are fully committed to buying a home are unlikely to be swayed by the FOMC’s decision to raise rates.”
She points out that for the typical homebuyer shopping for the median U.S. home, valued at $191,200, an increase in mortgage rates from 4 percent to 4.25 percent would increase their monthly mortgage payment by $22. Across the U.S., the monthly mortgage payment on the typical home would increase by only $25 or less in 18 of the largest 35 metros if rates rise from 4 percent to 4.25 percent.
Lantz argues that buyers are more concerned about a host of barriers to homeowners, including thin inventories, unaffordable prices and saving for down payments. “They are all part of the picture,” she said.
Moreover, the picture parts are connected. “Should economic indicators continue to improve and the pace of policy normalization picks up, we will eventually see the end of incredibly low mortgage rates and corresponding high affordability,” she said.