Decisions made at this week's Fed meeting could make borrowing for a home more expensive, but Americans – especially millennials – are less likely to be worried about rising interest rates than they are about finding a home they like.

On the eve of a pivotal Fed meeting that could shift mortgage interest rates, more Americans worry they won’t be able to find a home or that they couldn’t get a mortgage than worry about rates rising.

Nearly a third, 30%, worry that they won’t be able to find a home for sale that they like if they were to buy a home this year, according to a survey conducted online by Harris Poll on behalf of Trulia from June 7-9, 2016, among 2,034 U.S. adults ages 18 and older.

Only 20% said they worried mortgage rates would rise before they bought.

Fears of finding a home appear to be growing for younger adults. Millennials, between the ages of 18 to 34 years old, were more likely to say they were worried about finding a home than other age groups: 37% said they worried they couldn’t find a home they liked – that’s up from 30% in our survey in September 2015.

“Consumers are increasingly worried about tight inventory when finding a home, and rightly so,” said Ralph McLaughlin, chief economist at Trulia. “Low inventory has been, and will continue to be, a strong headwind for house hunters, and impacts their ability to buy a home much more than increases in mortgage rates.”

Among other findings, Trulia said in its last quarterly inventory report that during the last four years the number of starter homes on the market dropped by 43.6% and the number of trade-up homes on the market decreased by 41%.

“Homebuyers should be more worried about finding a home than interest rates. In most markets, mortgage rates rates would have to be between 7% to 10% for financial advantages of homeownership to fall away.” Read more Trulia research about renting vs. buying.

If you were to buy a home this year, what would you be most worried about?

Answer % of Americans, September 2015 % of Americans, June 2016 % of Millennials, ages 18-34, September 2015 % of Millennials, ages 18-34, June 2016
I could not find a home for sale that I like 26% 30% 30% 37%
I could not get a mortgage 26% 24% 36% 34%
Mortgage rates would rise before I buy 24% 20% 26% 23%
Home prices would rise before I buy 23% 23% 28% 32%
I would have to compete with many other buyers 14% 15% 19% 20%
Home prices would fall after I buy 13% 14% 15% 20%
I would have to decide on a house very quickly 10% 12% 15% 17%

Americans Lean Toward Higher Rate Prediction, But Most Are Unsure

Though finding a home may be the primary concern for potential buyers, they do have some guesses about where interest rates will go. A solid 40% of Americans think interest rates will change in the next six months. The vast majority, 37% overall, say rates will go higher. Another 24% say rates will stay the same. Just 2% overall expect rates to go lower.

And perhaps the biggest finding: 37% aren’t sure.

 

Do you think mortgage interest rates will change over the next six months?

Response
Yes 40%
Yes, they will INCREASE 37%
Yes, they will DECREASE 2%
No, rates will stay the same 24%
Not Sure 37%

Americans Are Afraid of High Rates, But What’s Really High?

As you might expect, the higher the rates might go, the more Americans would be discouraged from buying a home. Even a small increase, such as the Fed spur rates on a 30-year mortgage to 5%, could impact home purchasing. 19% of Americans say they’d be discouraged if the mortgage rates rose to 5% and at 6%, another 19% would be discouraged.

Add that to the 28% who would say they will never buy a home (13%) or already feel mortgage rates are too high at 4% for them to consider buying a home (15%), we’d see a lot of hesitation. And should rates rise to 7%, 61% of Americans say they would be discouraged from buying a home.

Now consider that between 1971 and 2001 interest rates were at least 7% and for many years above 10% — from 1979 to 1991 for instance. In fact, “historically low” interest rates used to mean rates of around 6%.

Over the last year, mortgage interest rates have stayed steady between 3.5% and 4.0%. How high would rates have to rise to discourage you from buying your first or next home?

June 2016
At 4%, mortgage rates are already too high for me to consider buying a home 15%
5% 19%
6% 19%
7% 9%
8% or higher 11%
The mortgage rate does not concern me because I plan to buy a home without a mortgage 14%
I would never buy a home 14%

How Higher Mortgage Interest Rates Impact the Housing Market

When the Fed decides to raise rates, as it did in December, the increase is almost always nominal and subsequent hikes gradual.

If rates increase 25 basis points, mortgage rates are still at historical lows and exceptionally favorable for homebuyers. The actual impact on a typical homebuyer will be marginal, but this really depends on the buyer’s budget, according to Trulia research. A survey conducted online by Harris Poll on behalf of Trulia from September 14 -16, 2015 among 2,031 U.S. adults 18 and older, 69% of Americans who would ever buy a home said $250,000 or less is the maximum price that they would be willing to pay to buy their first or next home.

So for a buyer with household income of $60,000 and 20% down payment, the increase in mortgage rates on a 30-year fixed rate loan from 3.75% to 4.00%, would mean that the maximum amount they could spend on a home would fall from about $308,000 to $301,000 – keeping within the budget of most Americans. The drop is relatively larger for a buyer with household income of $100,000, but their budget is also relatively larger.  Long story short, an increase in rates would not turn people off from buying a home, but it may slightly lower the price range in which they are looking to buy. Also, the impact is quite dependent on the price range in which the prospective buyer is looking to buy.

Maximum Home Price for which Median Household Income Can Qualify

Annual Interest Rates $60,000 Median Household Income $100,000 Median Household Income
3.50% $316,298 $527,164
3.75% $308,965 $514,941
4.00% $301,852 $503,087
4.25% $294,955 $491,592
4.50% $288,268 $480,447

 

Survey Methodology

These surveys were conducted online within the United States by Harris Poll on behalf of Trulia from September 14-16, 2015 among 2,031 U.S. adults ages 18 and older, and June 7-9, 2016 among 2,034 U.S. adults ages 18 and older. These online surveys are not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables, please contact dweidner@trulia.com.