Rising Rates Will Lead Buyers to Cheaper Homes

Many real estate agents expected rising interest rates to affect the type of home prospective purchasers were shopping for, according to the results of a survey by Redfin.

Nearly 50% of those surveyed said that a rate increase to 5% in the next year would cause buyers to look for a lower priced property, Redfin reported Wednesday. A similar question posed earlier in December to homebuyers found that 2.6% of them would cancel their search altogether if rates went above 4%.

But the impact of higher rates may not just be on the buyer side of the equation. Among the agents that responded, 16% said that potential sellers with locked-in low rates would hold on to their current home to keep their cheaper mortgage. Additionally, 45% of agents surveyed said that sellers will still move, but will rent their previous home rather than sell it.

That latter group of homeowners though is contributing to supply issues that have been keeping many, particularly millennials, out of the purchase market.

“For some homeowners looking to move, it can be a wise decision to take advantage of the combination of rising rents and low mortgage rates by renting their current homes,” Redfin chief economist Nela Richardson said in a news release. “For this reason, we have a group of move-up buyers that are not making their starter homes available to the next generation of homebuyers, which is historically how more affordable inventory is added to the market. This is a double-whammy for the inventory crunch since not only are there fewer homes for sale but the ones that do get listed are mostly in a higher price range.”

Still, there were signs of optimism: 44% of agents said now is a good time to buy, which is the highest level reported all year and just one percentage point down from a year ago.

by Jacob Passy