Will this mortgage interest fear rattle homebuyers?

It’s not quite Halloween yet, but homebuyers may have already had a good scare.

The 30-year fixed-rate mortgage, which most buyers rely on, rose from around 6% to almost 6.75% in about three weeks.

And this happened right after the Fed finally reversed course and cut its own interest rate. Good timing, I know.

Prior to this rate reversal, mortgage rates had been steadily declining from 8%, their current cycle high, which ironically occurred just before last Halloween.

Talk about a good year for interest rates with a decline of two full percentage points. But the trend is no longer our friend, at least for now.

Now I want to explain why this could actually be good for the real estate market.

Higher mortgage rates could be more motivating than lower rates

I know what you’re thinking: Higher mortgage rates can’t possibly be good for the struggling real estate market.

Especially this housing market, which is currently one of the most unaffordable in recent history.

But bear with me here. It recently occurred to me that low mortgage rates don’t seem to have deterred potential homebuyers.

As noted, interest rates fell significantly from their cycle highs, falling by about two percentage points.

In mid-September, you could get 30-year fixed financing for around 6% for an average loan scenario. And in reality, much lower if you had a standard loan (high FICO, 20% down payment, etc.) and/or went with a discount lender.

The same applied if you paid discount points at closing. Back then, I even came across interest rates in the high 4 percent range.

Surely that would be good enough to get potential buyers to take a bite. But the mortgage application data simply wasn’t responding.

Seasonality is to blame, as it is a suboptimal time with interest rates reaching their lowest level since the beginning of 2023.

However, if you look at the Mortgage Bankers Association’s (MBA) seasonally adjusted home purchase application index, you’ll see that it’s barely changed. See the chart above from Trading Economics.

In the meantime, the number of refinancing applications has risen sharply, but these are much more sensitive to interest rates. However, with prices at their best in years, homebuyers just weren’t coming.

And this was surprising as there were rumors that they would flock to the property market as soon as secondary interest rates fell.

In fact, there were some who advocated buying a home early to beat the rush. This too seemed to be little more than a misguided dream. And it could have anything to do with it motivation.

Perhaps homebuyers wanted even lower mortgage rates

In retrospect, perhaps the reason for this was the idea that falling mortgage rates simply make homebuyers thirst for something better.

It’s a weird psychological thing. Once you get something good, you want more. And when you get more, it doesn’t seem as good as it used to be. You need more.

Simply put, falling mortgage rates seemed to be less motivating than rising rates, strange as that may sound.

When interest rates rise, there is great urgency to lock in a rate before things get worse.

If interest rates go down, you should wait and wait for even better results. That seems to be exactly what potential buyers have been doing.

Although they had previously been told to avoid the onslaught, they were now told to wait. So not only have lower interest rates not put buyers off the fence, they’ve actually cemented them further.

Of course, I recently argued that it’s no longer about mortgage rates, but that it could be other things too.

It could be an uncertain economic situation, it could be homebuyer burnout, it could simply be that house prices are too high. Yes, that is also a possibility!

However, and this is even stranger, now that buyers are scared off by higher prices, this could actually cause them to jump off the fence!

(Photo: Marcin Wichary)

Before creating this website, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My practical experience in the early 2000s inspired me to write about mortgages 18 years ago to help potential (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.

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