Homebuyers expect further interest rate hikes this year

Yesterday, the Federal Reserve increased its benchmark interest rate a quarter point to a new target range of 1% to 1.25%. It was a widely watched move as it reaffirms the Fed's confidence in the country’s economic growth and signals a continuous rate-hike trend after two recent increases.

Despite those two recent rate hikes in December 2016 and March 2017, home mortgage rates have trended downward since last November, hitting a new 7-month low last week, due to movements in other interest rates, for example in the bond market, that also affect home mortgage rates. Homebuyers appear to see the downward trend as temporary, however, and expect to see more interest rate increases, as well as new home mortgages to get more expensive.

In the latest ValueInsured quarterly Modern Homebuyer Survey conducted in Spring 2017, a nationally represented sample of Americans – including homeowners and renters who want to upgrade or to buy – were asked about their opinions and predictions on interest rate movements. The majority expects to see further rate increases this year:

  • Among all Americans surveyed, over 6 in 10 (65%) believe there will be more interest rate increases in 2017.
  • Over 3 in 4 (76%) of existing homeowners who express a desire to upgrade to a new home believe there will be more interest rate increases by the Fed this year. 56% of non-homeowners who wish to buy believe the same.
  • There is an interesting divergence of rate movement expectations among Millennials who own homes versus those who don’t. 80% of Millennial homeowners believe there will be more rates increases in 2017, while only 48% of Millennial non-homeowners who wish to buy a home believe the same. One possible explanation could be that Millennials who already own may be more fiscally savvy, and more in tune with analysts’ rate movement predictions.   

Interestingly, existing homeowners who want to sell and upgrade to a new home are most pessimistic about the future of affordable home mortgages:

  • 71% of existing homeowners who want to upgrade say the era of historically low interest rates and affordable mortgages is coming to an end. Given the record-breaking refinancing activities in recent years, presumably many homeowners who wanted to take advantage of low mortgage rates had already done so, so these homeowners have been spoiled, for lack of a better word, and may think twice before buying a new home at higher mortgage rates.
  • New homebuyers seem less concerned about rising mortgage rates. Just over half (51%) say the era of affordable mortgages is coming to an end. Overall, 61% of all Americans agree with the sentiment.

Refinancing volume this year has plummeted to a 10-year low, down as much as 39% in the first quarter of 2017 versus before the Fed started raising rates in December. Many existing homeowners are hesitant to give up their low mortgages even if they want to sell and trade up. There are recent reports that instead of upgrading, homeowners are choosing to take on home improvement projects instead to meet their housing needs. This contributes to the severely tight inventory we see in many markets this spring home buying season, restricting entrance of new homebuyers and driving us prices.

Many industry analysts predict yesterday’s Fed rate hike will not be the last one this year. Some also expect at least three more hikes in 2018. As rates go up, naturally competition to buy homes could soften, normalizing home prices from currently inflated values in many of the country’s hottest markets. But what effects would that have on homebuyers who bought at top of the market in the past two years? Or increasingly high number of homebuyers who took advantage of adjustable low-rate mortgage and who will become sticker shocked when their low-rate mortgages expire?

Americans buy homes primarily to provide shelter for their family, but many fiscal and social factors help shape their personal decisions. As we have seen, climbing rates deter some homeowners from upgrading. With potentially four more rate hikes expected on the horizon, the most changes the Fed has orchestrated in over a decade, it will be interesting to see how housing demand – and prices – may fluctuate in the next few years. It could be a rollercoaster ride, but may not be fun for all homeowners and homebuyers.