How Higher Mortgage Rates Affect New Home Buyers

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While the shortage of homes for sale is dwindling, homebuyers still have limited options after decades of underdevelopment. If you’re in the market right now, you might be thinking: why not just build a new home? While new home construction has advantages, the current market presents some significant and costly challenges for both builders and buyers.

How will higher mortgage rates affect new home buyers?

Higher mortgage rates aren’t great news for people looking to buy a home, but they can pose bigger problems as you wait for your new home to be completed. That’s because mortgage lenders typically allow buyers to set interest rates within a narrow window — anywhere from one to four months.

“I think buyers have to understand that we’re in an environment where interest rates are going up and there’s a good chance they’re only going to be able to lock in rates for three to six months until the house is ready,” said Robert Little of Henderson, Nevada. Robert Little Group and RE/MAX Advantage. “They’re better budgeting for higher rates and payments to make sure they’re happy with their payments.”

Alternative plan? Some new home buyers are pulling out of contracts. In fact, cancellations rose to 14.5% in June from 6.5% a year earlier, according to John Burns Real Estate Consulting.

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However, the termination of one buyer could represent a new contract for another, thanks to builders actively seeking to sell projects.

“We are now seeing more new construction opportunities and faster move-ins due to increased inventory and contract failures,” Little said. “Builders are also offering huge incentives for near-complete inventory or cancelled contracts – much more than six months ago.”

Why are mortgage rates fluctuating in 2022?

Mortgage rates are constantly changing. While they have been at record lows throughout 2021, 2022 will be quite different due to multiple forces.

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On the one hand, everything – including buying a home and building a new one – is more expensive due to 40 years of high inflation. The Fed has taken major steps to tame them, including raising interest rates. While the Fed rate hike isn’t directly related to fixed mortgage rates, it does have some impact. Mortgage rates typically rise or fall ahead of inflation reports and central bank meetings.

However, a better indicator of changes in fixed mortgage rates is the 10-year Treasury yield. As it rises and falls, interest rates on fixed-rate mortgages are also rising.

Even if the Fed raises interest rates, its actions could push the economy into a recession (to many, the decline in GDP in the first half of 2022 indicates that we are already in a recession). When the economy isn’t growing, mortgage lenders must strike a delicate balance to keep rates attractive enough for borrowers while still being profitable.

When will mortgage rates fall again?

The rapid rise in mortgage rates has cooled recently, but the overall trend remains much higher than in 2021 and 2020. While there is no crystal ball to forecast the housing market, the Fed’s work to curb inflation means mortgage rates in the 5% range will remain unchanged for the foreseeable future.

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Tips for new home buyers today

You don’t have to give up your plans to buy a brand new home, but you do need to do some additional considerations:

Check the contract

The materials you need to build your home can cost you today and more when you buy them. For example, the price of framing lumber rose 167% between August 2021 and early 2022, according to NAHB.

“Buyers need to check to see if there are any clauses that pass the increased delivery costs on to them, or if they’re locked into a fixed-price contract,” Little said.

Don’t expect anything to happen anytime soon

In addition to potentially higher costs, be prepared for longer delays.

“New homes in our area are taking longer than they did a few years ago — eight months to over a year and a half,” Little said. “Buyers should get a reasonable completion timeline from the builder and be aware that current supply chain issues may take longer. Buyers need to balance this with the current resale inventory on the market to find the best path. ”

Working with a new family specialist

When comparing the nuances of an existing home for sale versus a new build, take the time to find a real estate agent who specializes in brand new homes. Your surrogate can be a valuable ally as you navigate this long process.

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