The recent surge in mortgage rates is hindering the plans of first time home buyers to purchase this spring. According to a report recently released by the realtor.com, the increase in mortgage rates in the last two months of 2016 have facilitated the decrease in the percentage of first time home buyers to 44 percent from 55 percent in October.
The 2017 housing market will be a year of slowing, yet moderate growth, set against the backdrop of a changing composition of home buyers and a post-election interest rate jump that could potentially price some first-timers out of the market, according to the realtor.com 2017 housing forecast.
“The rise in rates is associated with an anticipation of stronger economic and wage growth, both of which favor buyers,” says Jonathan Smoke, chief economist for realtor.com. “At the same time, higher rates make qualifying for a mortgage and finding affordable inventory more challenging. The decline in the share of first-time buyers since October suggests that the move-up in rates is discouraging new homebuyers already.”
According to the realtor.com’s report, first-time homebuyers giving a 20 percent down payment on a median-priced home at the current average 30-year rate would be liable to pay an additional $720 in interest each year. Record-high home prices will badly affect the first-time homebuyers, as well. The median list price in December 2016 matched the median list price in July 2016: $250,000. Inventory of housing units in December 2016, in addition, stayed limited, setting the new year up with the lowest inventory since the downturn.
The most notable characteristic of the 2017 home buying season is expected to be the large number of first time home buyers entering the market. “This represents an ‘oh shift’ moment in housing,” said Jonathan Smoke, chief economist for realtor.com. “With so many first-time buyers in the market, competition will be even fiercer next year for affordable starter homes in the suburbs. Those looking to buy may want to consider a winter home purchase in order to avoid bidding wars and higher prices spurred by a potential increase in millennial buyers.”
The rise in rates is not stifling demand overall, though, according to realtor.com’s report—in fact, repeat homebuyer activity has continued, as buyers, uncertain about the future, take advantage of still-low rates. Consumers recently surveyed by Fannie Mae believe now is a good time to buy a home, but also believe mortgage rates will rise in the year ahead.
“Last fall, we saw a large jump in the number of first-timers planning home purchases, which was very encouraging because their market share is still well below pre-recession levels,” Smoke says. “But, as evidenced by their decline in share, first-time buyers are really dependent on financing, and affordability is one of their largest barriers to homeownership. This number could continue to decline with anticipated increases in interest rates and home prices.”