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Rising Interest Rates and Lack of Inventory Concern Homebuyers

As mortgage rates creep upward, with the effect of increasing the amount of house payments, many prospective buyers feel that this is among the top factors impacting their ability to purchase a home. According to a new survey conducted by Zillow, 53 percent of current home shoppers feel that this is a major concern.

Mortgage rates increased following the U.S. presidential election and federal funds rate hike in December. With several more federal funds rate increases expected this year, rising rates may have an impact on home buying activity and affordability for the first time in years.

Another concern is the limited supply of homes in some areas. Sixty-five percent of respondents to the survey currently looking for a home, said they are most concerned about finding an affordable home amidst low inventory. When this same survey was conducted in 2015, only 50 percent of respondents were concerned about rising mortgage rates. This ranked lower than concerns about finding an affordable home (73 percent) and saving for a down payment (59 percent).

Despite rising interest rates, 83 percent of respondents planning to buy within the next three years will continue with their home buying plans even if rates increase their monthly mortgage payment by $100. Nearly half (49 percent) of home shoppers would move forward with a home purchase even if rising rates were to increase their monthly payments by at least $200.

Rising rates and increased monthly payments mean that buyers’ budgets will be more limited. To offset this, one-fourth of home shoppers say that they would consider buying a smaller home or purchasing a home in a less expensive community if their payments were increased by $100. Additionally, 38 percent said that if their monthly payments went up $200, they would adjust the price of the home they hope to purchase.

"For years, falling interest rates have been a boon to the U.S. housing market, keeping monthly mortgage payments low for first-time and move-up buyers alike, even as home values rose," said Erin Lantz, vice president of mortgages for Zillow® Group. "As rates rise this year, first-time buyers and those looking to buy in expensive markets where affordability is already an issue will feel the pinch of higher rates on their budget. That said, for most borrowers, there is quite a bit of head room for rates to rise before home-buying becomes unaffordable."

Buyers that will be most affected by a rate increase will be those living in U.S. metro areas where housing is expensive. In markets such as San Francisco or San Jose, monthly mortgage payments could increase by $400 or more if mortgage rates rise to 5.0 percent.

In other areas, payments on a home valued at $595,700 in the Los Angeles/Long Beach/Anaheim, California, area would increase by $283 per month with a rate increase from 4 percent to 5 percent.

Payments on a home in Tampa, Florida, valued at $181,200 would increase by $86 with an interest rate increase from 4 percent to 5 percent.

According to the latest Zillow® Home Price Expectations Survey, which polled 100 housing market experts, the effect of housing affordability in the wake of rising mortgage rates is set to be the most significant force driving the housing market this year.

About Author: Sandra Lane

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