According to a new survey from Zillow Group Mortgages, the majority (53 percent) of current U.S. home shoppers consider rising interest rates to be among the top factors impacting their ability to purchase a home. 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.
Respondents who are currently in the process of searching for or buying a home claim they are most concerned about finding an affordable home amidst low inventory (65 percent), followed by concerns over rising interest rates (53 percent). When this same survey was conduct in 2015, rising mortgage rates (50 percent) ranked lower among top concerns for home buyers, falling behind both finding an affordable home (73 percent) and saving for a down payment (59 percent).
Despite rising concerns, plans to purchase won't be impacted - at least initially. Most people (83 percent) 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.
That said, as rates rise and monthly payments for homes will increase, buyers' budgets will be more strained. A quarter of home shoppers claim they would reconsider the type of home they are searching for, such as looking for a smaller home or less expensive community, should their monthly payment increase by up to $100 (25 percent). If monthly payments were to increase up to $200, another 38 percent of home shoppers would change the budget of the home they are searching for.
"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."
For the typical homebuyer shopping for the median U.S. home, valued at $195,300 an increase in mortgage rates from 4 percent to 4.25 percent would increase their monthly mortgage payment by approximately $23. Across the U.S., only 4 of the largest 35 metros would see monthly mortgage payments rise by more than $100 should rate hit 4.5 percent. If rates rise to 5.0 percent, 19 of the largest 35 metros would see monthly payments on the median home rise by $100 or more.
The buyers that will be hit the hardest by a rate increase will be those living in U.S. metros where housing is expensive. In markets like San Francisco or San Jose, monthly mortgage payments could increase by $400 or more if mortgage rates rise to 5.0 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.