The peaks and valleys of mortgage interest rates have left some home buyers off the ride. The historic lows had 2020 and early 2021 buyers spoiled, but now buyers face a whole other level of uncertainty and volatility as rates jump around.
Last week, as rates increased, active buyers stepped back from their hopeful home buying goals that were “more favorable” in the week prior. Today, the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications showed a 13.3% decrease from a week earlier.
“Mortgage rates increased across all loan types last week, with the 30-year fixed rate jumping 23 basis points to 6.62%—the highest rate since November 2022. The jump led to the purchase applications index decreasing 18% to its lowest level since 1995,” says Joel Kan, MBA’s vice president and deputy chief economist.
Stephanie Weeks, originating branch manager at The Weeks Team, CrossCountry Mortgage, says, “When the rates jump around like this, it negatively affects home buyer confidence. It’s not always a short distance between home shopping, identifying the right home, and then getting it under contract.”
On the Sidelines
The decrease in mortgage applications is an indicator that buyers are fretful of the current interest rate roller coaster—especially first-time home buyers.
“For active shoppers, rate instability can be a bit tricky. When rates bounce around, it adds a level of uncertainty that can stress some buyers out. Some consumers may decide to step back into the sidelines to wait things out until there’s more certainty,” says Ali Wolf, chief economist at Zonda. “We are already seeing that in Zonda’s preliminary results from our monthly builder survey. Some builders are reporting that the month started strong but started to slow in response to higher mortgage rates.”
Kan agrees that buyers are hesitant as rates currently shoot upward. He adds, “This time of the year is typically when purchase activity ramps up, but over the past two weeks, rates have increased significantly as financial markets digest data on inflation cooling at a slower pace than expected.
“The increase in mortgages rates has put many home buyers back on the sidelines once again, especially first-time home buyers who are most sensitive to affordability challenges and the impact of higher rates.”
Last year at this time, the average contract interest rate for a 30-year fixed mortgage was 4.06%, making today’s rates seem a bit scarier and leaving buyers wondering if they should have bought then.
Is There a Right Time?
Wolf points out that those who aren’t actively looking may not find the rates as much of a deterrent. “Unlike many of us in the home building industry, most Americans don’t track mortgage rates like hawks,” she explains. “For some prospective home buyers, they are making the decision to buy and sell based on lifestyle and needs. The rate will influence what they can purchase but isn’t the ultimate driver.”
However, for active buyers the restraint high interest rates places on their budgets can create more challenges amid the housing market’s limited inventory and high prices. While it seems there isn’t a right time to buy, some lenders are offering “buy now, refinance later” perks and home builders’ incentives are available.
As the spring selling season arrives, competition is expected to drum up, but there are ways to prepare. Kate Wood, home expert at NerdWallet, says, “Because the amount a lender is willing to let a buyer borrow is dependent on the interest rate quoted, it’s vital for buyers to keep their mortgage preapprovals up to date. Finding out that the amount a buyer can afford to borrow has dropped because rates have increased is disheartening, but it’s better to find out ahead of time rather than when they’re getting ready to make an offer.”
What Can Buyers Do?
When buyers are ready to jump back into the game, Wood suggests that they can focus on things they can control. “Strengthening credit scores, paying down debts, and avoiding making any big financial changes will help make a buyer a more well-qualified candidate, so that when they go to a lender, they’re more likely to get the best rate they can offer that day.”
To combat the unknowns, Weeks recommends a rare, but helpful “lock-and-shop” option. “The distance to closing makes people very wary of preceding when they don’t have a good reference point or hold on what their rate will be because its jumping all over the place,” Weeks says. “With the lock-and-shop option, you are able to lock in an interest rate at the current pricing while you find that perfect home without the stress of wondering what your interest rate may be.”
And if fluctuating rates are still worrisome while under contract, Wood recommends locking in an interest rate that won’t rise before closing or asking about a float-down loan that can allow a locked rate to “float down” if interest rates take a dive.
As the Feds continue to battle inflation, there’s no clear answer on when buyers will find relief and assurance that they’re making the right choice. “Ultimately, consumers like stability and certainty when making one of the largest purchases of their lives,” Wolf concludes.
