Higher mortgage rates have a ‘deterrent effect’ on homebuyers, economist says

Earlier this year as rates neared 4%, homebuyers rushed to make a purchase. Now that rates are soaring toward 5%, buyers are more cautious, according to one expert.

“Now rates are so high, it's having more of a deterrent effect than an encouraging effect on homebuyers,” Daryl Fairweather, chief economist at Redfin, recently told Yahoo Finance Live (video above). “​​Most of the people on the market are now facing much higher mortgage rates, [which] adds to their housing expenses and makes it less likely that they're going to bid over asking.”

The rate on the 30-year fixed mortgage hit 4.72% last week, the highest level since December 2018, according to Freddie Mac. Rates are 1.5 percentage points higher than just at the beginning of the year.

Higher rates are causing homeowners to think twice when it comes to selling and trading up, causing a “lock-in” effect constraining inventory for existing homes. The lock-in effect is fueling an affordability crisis, especially for first time buyers.


“There aren't that many sellers, so there's much more demand than there is supply,” Fairweather said.

Credit: Getty Images
Credit: Getty Images (Scott Olson via Getty Images)

One upside to higher mortgage rates is that it may limit extreme bidding wars.

“Homes would get a dozen offers — now it's more like two or three — that's still multiple offers and still could lead to a situation where the home goes above asking price,” Fairweather said. “But I think as time goes on, it'll go down to just one or two offers or one or zero offers, and homes will actually start to sit on the market.”

There are two ways for homebuyers, especially first-time ones, to find a house in this tough market, according to Fairweather: Move to a more affordable market or compromise on a smaller home. Fairweather expects many buyers will choose a more affordable market because the rise of remote work has made that more of a possibility.

That means while home prices in places like Austin, Texas, have gone up 20% — which seems steep — the actual cost is considered a deal by buyers from even more expensive markets like New York or San Francisco.

“There's a lot of opportunity for many people to look at whether where they live is really where they should be living, given how expensive things are getting, and reevaluate that,” Fairweather said.

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Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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