After months of upward trends, home mortgage rates have retreated somewhat and are currently at an average of 4.39 percent for a 30-year fixed loan, lower than levels in June. However, after two benchmark rate hikes already this year, two more are signaled by the Federal Reserve and are expected by top analysts for 2018, meaning current mortgage rates most likely could increase again.
In ValueInsured’s latest Modern Homebuyer Survey, over 3 in 4 Americans (76%) believe mortgage interest rates will continue to go up in 2018. Nearly 6 in 10 (59%) predict an average 30-year fixed rate will reach 5% by the beginning of 2019, and 13% Americans expect to see 6% 30-year mortgages by the end of 2019.
Rate hike expectations have been shown to spook the equity market (remember all the excitement during the first week of February?) and curb consumer spending. Some reports indicate homebuyers have not appeared deterred by rising mortgage rates. However, in ValueInsured’s latest survey, some Americans expect a rate threshold could set in motion a slow down in home buying. Fifty-six percent believe a 30-year fixed at 5% could be a psychological tipping point that would stifle housing demand.
This finding is consistent with latest market conditions. In some markets, homebuyers are already over-extended before any further rate hike. In Los Angeles, monthly mortgage payments on a median priced home today represent over 45% of the median household income. In San Jose, a mortgage takes up over 50% of income. CoreLogic reported that nationally, first-time homebuyers’ mortgage payments have increased 19% in just one year for the same home. As a point of reference, during the same one-year period, average wage increases were 2.5%. Zillow expects when 30-year fixed rates reach 5% by 2019 (as forecasted), new San Jose homebuyers will on average spend 61% of their income on mortgage payments; Seattle homebuyers will spend 31%.
However, the effects on rising mortgage rates go far beyond mortgage payments for homebuyers. It also affects housing inventory when homeowners sit on their low mortgage rates and refuse to sell – and in turn, opt out of the upgrade buyer market – or when parents cannot afford to complete a cash-out refinance to help their children buy a home. In ValueInsured’s Q2 survey, 41% of all homeowners say they have or plan to use a cash-out refinance loan to help their adult children buy a home. Coincidentally, 41% of all millennial homeowners reported they have received a gift or a loan from a parent and/or in-law to help fund their last home purchase.
As we inch toward a five percent 30-year fixed mortgage rate, ValueInsured’s quarterly survey will re-exam these consumer sentiments to gauge how shifting rates will continue to affect perception of affordability, parents’ gifting power, and ultimately housing demand.