Homeowners more in tune with – and more pessimistic about – interest rate hikes vs. buyers

Since hitting record-low in summer of 2016 post-Brexit, U.S. mortgage rates have rebounded, with 30-year fixed rate crossing the important psychological benchmark of 4% at the beginning of 2018. Citing a healthy economy and to keep inflation in check, the Federal Reserve raised benchmark interest rates three times in 2017, with many believing another three to four hikes could be in store for 2018. By all reports, the chance of a 2018 without another rate hike is virtually zero. Some Fed insiders went as far as proposing up to eight rate hikes in the next two calendar years.

Interestingly, this appears to be something existing homeowners are a lot more in tune with. One would think homeowner hopefuls – Americans who are in the market for a home and desire to buy in the near future – would also be more aware of upcoming rate increases, after all it could have certain implications on their budget and buying timeline. However, according to ValueInsured’s latest quarterly Modern Homebuyer Survey, non-homeowners who wish to buy in the next three year report to have a lower awareness of upcoming rate hikes, or they are more optimistic that a rate hike may not happen. According to the survey results:

  • 74% of all American homeowners expect more interest rate hikes by the Fed in 2018, compared to only 57% of non-homeowners who wish to buy soon who expect the same; that’s a 17 percentage-point differential.
  • Millennial first-time homebuyers are even more optimistic; with less than half (48%) expecting there will be any more Fed rate hike in 2018.

Contrary to potential homebuyers and in particular the younger generation who wish to buy a home soon, existing homeowners seem downright pessimistic about the future of home mortgage rates. As the record refinance volumes in the past two years indicated, many homeowners in America saw the low rates as once-in-a-lifetime opportunity, and many were willing to pay thousands of dollars in out-of-pocket closing costs to take advantage of the low rates. It makes sense, as it appears from ValueInsured’s findings that many homeowners saw the low-rate opportunities as perhaps now or never, and their window could be closing soon:

  • 72% of existing homeowners in the survey believe the era of historically low rates and affordable mortgages are coming to an end. This is particularly acute among homeowners of expensive homes, with 95% of those who report to own a home valued at $1 million or more expecting the end of rates this low in their lifetime.
  • Among non-homeowners who wish to buy in the next three years, the sentiments toward affordable mortgages are decidedly more optimistic. Barely half (51%) agree the era of historically low rates and affordable mortgages is coming to an end. It is possible that those who maintain this attitude are more likely to stay excited and motivated about buying a home.
  • Millennial first-time homebuyers are the most optimistic segment. 56% believe mortgages are still very affordable, while 44% believe the window of low-interest rate loans is closing soon.

Ultimately, the idea of “affordable mortgage” is often in the eye of the beholder. Motivated homebuyers also tend to be a self-selecting group who are more likely to believe buying a home is a financially sound decision. However, when compared to results in previous quarterly surveys, there is no doubt the perceived stakes are higher among homebuyers. Those who believe a home they buy today would be worth the same or more a year from now have for the first time dipped below 50% in the quarterly survey, to 49% compared to 53% a year prior. During the same period, percentages of homebuyers who believe home prices are too high and unsustainable have steadily risen. As interest rates and home prices continue to increase, homebuyers are commiting more, whether they maintain their optimism or not. The need for an exit strategy and safety net for a potential down market is ever more urgent.