Photo: Robert Clark

In September, national interest rates rose to their highest level in nearly five years, causing some homebuyers to momentarily put the brakes on their home search.

Fewer Americans now expect to see interest rates to decrease over the next 12-months despite the overall health of the housing and economic markets, according to the latest Home Purchase Sentiment Index from Fannie Mae.

Consumers who say it’s a good time to buy a home have become much less likely to say that this is because of favorable mortgage rates and consumers who say it’s a bad time to buy a home most often cite high home prices over mortgage rate, economic, and other concerns,” Fannie Mae market insights researcher Sarah Shahdad tells Livabl.

The average 30-year fixed mortgage rate rose for the second consecutive month to 4.63 percent in September. As many as four more possible rate hikes are projected over the next year.

Rising rates translate to more expensive mortgage payments, which crimps affordability for would-be homebuyers. The increased rates adds to what is already a laundry list of obstacles facing buyers,” Stribling & Associates director of data and reporting Garrett Derderian tells Livabl. Stribling & Associates is a leading New York brokerage.

But the downside risk to the housing market posed by rising interest rates is offset by a broader economic strength, thanks to a booming economy and growing jobs market — which helped boost current buyer and seller positive perceptions of current home buying conditions.

In the short term, as rates are expected to rise and the economy is reportedly strong, there will be some buyers who were on the fence move into the market and purchase, out of fear rates will continue to rise. However, the larger concern is the lack of available inventory within reach of many first-time homebuyers, or those looking to transition within the housing market,” says Derderian.

So far, the overall rise of interest rates has been slow and steady which hasn’t really have much of a marked impact on home prices yet. And, in a strong economy where wages are growing, most buyers can absorb a slight bump — provided it’s done over time.

However, over a longer period of time, rising mortgage rates can weaken demand — especially in the entry-level market where inventory is scarce. And less demand translates to weak to moderate price appreciation.

“Under current conditions, housing prices have outpaced wage growth, adding pressure to an already tight housing market plagued by an inadequate supply of inventory. Although each interest rate hike may seem insignificant in itself, the total amount paid by the borrow can significantly increase based on the size or length of the loan,” says Derderian.

Looking ahead, it seems unlikely rates will see a cut until at least 2021. Buyers should be prepared for rates to increase while they are looking at homes and factor additional increases into their budgets.

“The general consensus is the Federal Reserve is adopting a fairly hawkish monetary policy. In essence, the central bank is going to stick to a tighter monetary policy, and will continue to raise rates even if economic growth should slow,” says Derderian.

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