Already, rates have crept higher in anticipation of Fed action — and that is forcing both buyers and sellers to reevaluate their budgets and behaviors. Average rates on 30-year fixed-rate mortgages have climbed in recent weeks by about a quarter-percentage point, from 3.75 percent to almost 4 percent — about a $600-a-year difference on a $350,000 mortgage.
Several sources of data suggest that buyers are paying more attention to the threat of higher rates. The number of mortgage applications submitted this fall was about 20 percent higher compared with the same period a year ago, according to the Mortgage Bankers Association, an industry group. That could reflect the fact that more people are looking to buy even after the busy summer season. The number of home tours requested in October by users of the real estate Web site Redfin increased 34 percent compared with the same time last year.
But while some are moving more quickly to buy, others are feeling as though an opportunity may have passed.
Kradak Thomas, a 43-year-old chemist living in Potomac, Md., said he and his wife had recently considered moving their family to Virginia for a shorter commute. But moving from their home, where they have been for seven years, would have meant giving up a 3.25 percent mortgage rate.
The higher rates now mean they would need to find into a less expensive, potentially smaller home in order to keep their monthly mortgage payment about the same. So they have decided to stay put.
“You add all of those things up and say, ‘Well, what’s that going to do for us as a family?’ ” Thomas said.
Predicting how the housing market will respond to higher rates always involves some guesswork, and many factors can influence home-buying activity. The last central bank hike was in 2006 — before the iPhone was released — and many in the industry have little experience working in a rising-rate environment. In addition, there is no precedent for increasing rates after such a long period at historically low levels.
“There is a level of urgency to consumers when they think — whether there is one or not — that there is a rising-rate environment,” said Katie Miller, vice president of mortgage lending at Navy Federal Credit Union.
More than 90 percent of buyers in a recent Redfin survey cited low interest rates as motivation for purchasing a home. Rob Ross, senior vice president at the lending service MVB Mortgage, said his workload has jumped from one new home loan a day to as many as six.
“Psychologically, when people say the Fed is going to raise interest rates, it may push people to get off their duff,” said Lorraine Arora, managing broker at Weichart Realty in Fairfax County.
The Mortgage Bankers Association expects that rates on 30-year loans could reach 4.8 percent by the end of next year, topping 5 percent in 2017. Rates haven’t been that high since the recession.
The Fed aimed trillions of dollars in stimulus at the housing market in the wake of the financial crisis, buying up mortgage-backed securities to help push rates to record lows. But that is not the only factor influencing the direction of mortgage rates. Interest rates in the United States are being held back by uncertainty in the global economy and easy money in other countries. (The Fed doesn’t control mortgage rates; it does manage a rate that banks use to charge one another for overnight loans, setting the baseline for all other activity.)
Realtor.com’s analysis found that as many as 7 percent of people who applied for a mortgage during the first half of the year would have had trouble qualifying if rates rose by half a percentage point. Government regulations require lenders to consider potential buyers’ debt in comparison with their income.
Higher interest rates effectively mean that borrowers cannot spend as much on a home. Wells Fargo economist Mark Vitner said that could hamper the ability of all but the wealthiest borrowers to jump into the market.
“The lower end is having a hard time coming up with the down payment,” Vitner said. “The middle has seen very little increase in pay, and the upper end, they’re not as sensitive to interest-rate increases.”
Even when mortgage rates begin to rise, they are still likely to be low by historical standards. The Fed has tried to assure financial markets that it expects to increase its benchmark rate gradually over the next few years, allowing the economy plenty of time to digest the moves.
But even a tiny bump in rates could have a big impact on buyers’ wallets. Realtor.com’s chief economist, Jonathan Smoke, estimated that an increase of half a percentage point translates into a 6 percent rise in monthly payments. On an average loan of $231,000 with a mortgage rate of about 4 percent, that’s an extra $68 a month.
New York state resident Melanie Theisen had hoped to find a home before the interest rates go up. But the 41-year-old government contractor is having a hard time finding a home within her $200,000 budget that has what she wants: a two-bedroom cottage with at least half an acre of land for planting a garden and raising chickens. So she moved into a rental and plans to keep looking throughout the winter.
Theisen hopes her strong credit score and sizable down payment will help her qualify for a good loan, even if interest rates rise. A rate increase might reduce how much of a loan she can qualify for, but waiting would also give her time to keep saving and adding to her down payment.
“I didn’t want to be pressured into something that wasn’t what I wanted,” Theisen said.
Higher interest rates can also affect decisions among potential sellers, many of whom may be loathe to sacrifice their ultra-low mortgage rates to move to a new home. The phenomenon is known as “rate lock,” and analysts said it could result in tight inventory for years to come.
Rather than drop out of the hunt, buyers are more likely to adjust to higher rates by lowering the amount that they are willing to spend. That could mean settling for a smaller home or one in a less desirable location.
Others simply wait, socking away money until their dream home can become a reality.
“The money part has been the biggest learning curve with me through this process,” said Britt Manchester, 27, a first-time home buyer from Arlington.
Manchester has her heart set on a two-bedroom condo on picturesque Corcoran Street in the Dupont Circle neighborhood. She has been living with her mother for the past two years to save money for a down payment. If higher interest rates mean she must wait a little longer and save even more, so be it.
“I know that my place is out there somewhere,” she said.