The residential real estate market has been red-hot for a while now but not many analysts are anticipating that low inventory, bidding wars, and rising home prices are going to stop anytime soon.  There are signs, however, that things may have at least started to cool, especially with rising mortgage interest rates. Is this really true? And what might be causing the slowdown?

Sticker shock, not just over the price of the home but also over the cost of the mortgage, may be one sign that a slowdown is about to happen.

What to Know About Rising Mortgage Interest Rates

State of the Economy Mid-2021

Despite some fears about inflation, the economic outlook post-COVID is looking good. The nation’s return to normalcy is coming, and with it, most Americans have greater individual savings, are experiencing increases in wages in many industries, and enjoying loose monetary conditions from lenders and the government. 

As long as the economic outlook post-COVID is optimistic though, interest rates should go higher. And for most buyers, that’s raising some eyebrows. 

The Spring Housing Market 

Spring is typically a busy time for the real estate market, but Spring 2020 really exploded! As it would be difficult to meet the momentum of the early pandemic surge, and inventories are lower than usual, forecasts are slower for 2021, although there remains robust demand. 

Moving into Spring 2021, the housing market continues to have demand higher than supply. Millennials are also helping to drive demand since many are now in their 30s, the prime age for first-time homebuyers.

Americans seem to continue to seek the same preferences as during the height of the pandemic, looking for single-family houses away from major cities and prioritizing things like yards, spare rooms, and area access to broadband technology. 

Is This a Bubble?

Bubbles are typically driven by speculation, and this is not generally the case with today’s spiking housing market. Current demand for homes isn’t coming from house-flipping or investments, but rather from the demand of people looking to change their housing circumstances. And keep in mind that housing markets do sometimes go through periods of irrational buoyancy and see prices rise rapidly before falling back in line.

If current home valuations are reminding of the bonanza of the mid-2000s, when the subprime mortgage bubble pushed prices up before plunging them down some 35%, also keep in mind that this time around, lenders willingness to issue mortgages is much restricted. 

Those with less than pristine credit scores and without sizable down payments have found it harder to obtain financing. This should allay fears of a market crash due to lenient lending policies the likes of which was seen around 2008. But… 

Interest Rates Are Rising

Ok, the economy is strong. The market has greater demand than supply, and traditional signs don’t point toward a bubble bursting, so what may be causing the market to cool? If anything, it’s because of rising mortgage interest rates. 

No one wants to miss out on the lowest mortgage rates in recent history. Early pandemic FOMO (fear of missing out) caused new homebuyers, especially Millennials and first-time homebuyers to enter the market even during the most uncertain early days of the health crisis. And now even those most cautious of potential buyers are trying to take advantage if they can find a property that suits them before rising mortgage interest rates enough to make the prospect prohibitive.

This was easy during the first quarter of 2021, when rates on a 30-year fixed-rate mortgage stayed below 3% percent until about the first week of March. By April 1, however, they increased to 3.18%, and analysts have projected that this increase in the cost of borrowing lowered the house-buying power of consumers enough to stop over 55,500 potential home sales.

And it’s going to get worse for buyers.  Freddie Mac projects rates will continue to rise, albeit slowly, eventually reaching an average of 3.4% by the end of 2021. This means loans are projected to be more expensive later, which has buyers scrambling to find homes and lock in their mortgage loans today if possible. 

So, if you’re a seller looking to take advantage of those higher sales prices that result from unprecedented demand, now is still a great time to get in on the action.  And if you’re in the market to buy and want to get a jump on rising mortgage interest rates before they rise again, contact LIST WITH ELIZABETH® today to start the process right away!