Data from online real estate company Redfin shows that requests for home tours have spiked more than 40 percent compared to a year ago. And they’re not just lookey-loos: Redfin also shows a 33 percent jump in signed offers from this time a year ago.
Company economist Nela Richardson attributes much of the surge in demand to the looming increase in interest rates. The Fed expects to raise its benchmark federal funds rate this year since slashing it to zero during the depths of the Great Recession. That causes the cost of borrowing money to go up across the financial system — including for mortgage rates.
Potential homebuyers are taking notice, Richardson said. Mortgage rates hit record lows over the past three years and have continued to hover near those rock-bottom levels. The average cost of a 30-year fixed-rate mortgage is about 4 percent.
Usually, when interest rates go up, consumer activity slows down. But Richardson said the opposite is true right now.
“What rates are doing in this time frame is encouraging people to buy now while it’s cheap as opposed to later when it may be a little more expensive,” she said. “That’s getting a lot of people off the couch and into the car to tour homes.”
It’s just one piece of data, so take it with an extra serving of salt. Richardson acknowledged that historical comparisons are tricky precisely because the housing market has undergone so much turmoil. In addition, Redfin has grown significantly in recent years, so data going back more than few years is not as robust.
People generally don’t buy a home just because interest rates are low. It’s a purchase that’s driven by life changes — marriage, kids, empty nesting — not swings in the financial markets. But interest rates can still help shift the direction of the market, and there are profound implications if Redfin’s theory holds up.
Consumers may have learned their lesson from what has become known as the Taper Tantrum of 2013. That spring, then-Fed Chairman Ben Bernanke signaled that the central bank might soon be ready to cut back the amount of money it was pumping into the economy — not raise its benchmark interest rate, mind you, just slow down the gushing spigot of easy money.
The comments took markets by surprise. Wall Street tanked, and mortgage rates jumped by a percentage point in just a few months. A 1 percentage point increase may not sound like much, but it translates into an extra $175 a month on a typical mortgage payment of $294,900. That’s real money out of consumers’ wallets, and it was one reason that the Fed opted not to begin phasing out the program until the end of that year.
The housing market is also much stronger than it was in 2013. Low interest rates had spawned a rush of investors into the market. This time, more traditional buyers are leading the way. Sales of existing homes in May hit the highest level in five years. The surge was driven by first-time homebuyers, a critical demographic that has been painfully absent from the market.
If this time is indeed different, and consumers are heeding the central bank’s warnings, then the Fed may find that process of raising interest rates may not be as rocky as feared.
This article has a lot of food for thought, I hope the interest rates do not slow down the market, but if this article and many others that I have read are right, now is the time to buy and not wait for things to change. If you would like more information on buying or selling please contact me today.
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