Higher rates could also exacerbate the current supply crisis in the housing market. Sellers will have less incentive to put their homes on the market, because most have near-record-low rates and would be buying into significantly higher rates. The market desperately needs more homes, especially entry-level homes, where sellers would be moving up.
In addition, home prices took their biggest jump in four years in March, due to that tight supply. As home prices rise, buyers have less padding in their pocketbooks for higher mortgage rates. Most buyers focus less on the overall price of a home and more on what the monthly payment will be. That is far more dependent on interest rates.
Buyers are starting to take advantage of the lower rates offered by adjustable-rate mortgages. The ARM share of mortgage applications increased last week, along with a significant jump in overall applications to purchase a home.
ARMs are a slightly more risky option, because they will adjust over time, but today’s ARMs are nothing like the ones underwritten during the heady days of the last housing boom, when lenders often required no down payments and no documentation. Today’s ARMs are fully underwritten with much tougher standards.