The 2023 spring homebuying season is right around the corner — and higher mortgage rates have some homebuyers feeling “extremely” stressed as many are forced to cut their home price budgets, according to a March 2023 survey by U.S. News.
Between March 23 and 27, U.S. News ran a nationwide survey of 1,197 Americans who are planning to buy a home in 2023 using a mortgage. We asked respondents a series of questions to find out how their homebuying plans are changed by mortgage rates and their impact on housing affordability. Here’s what we found:
— Two-thirds (66%) of 2023 buyers are waiting for mortgage rates to drop before home shopping. Thirty percent plan to wait until rates drop below 5.5%, and 28% want to see rates below 6% before entering the market. But more than a quarter (26%) are waiting for rates to drop below 5% — something that is not likely to happen during 2023. Perhaps unsurprisingly, 62% of respondents find it challenging to keep up with mortgage rates trends and news.
— Most homebuyers (62%) have had to reduce their purchase price budget due to higher mortgage rates. Among them, 39% are looking at homes in a different city with a lower cost of living — suggesting that motivated shoppers are willing to relocate for homeownership. Respondents also have had to shop for smaller houses (39%) or homes that need cosmetic repairs (37%).
— The vast majority (86%) are at least a little stressed about buying a home this year, with a fifth (20%) being “extremely” stressed about it. First-time homebuyers report being more stressed about purchasing a home this year than repeat homebuyers, who have been through the process before.
— The majority of respondents (61%) are first-time homebuyers. More than three-quarters of them (77%) regret not buying a home when mortgage rates were lower. However, 60% of first-time buyers have been saving up to buy a home for less than three years, so it would have been difficult for them to afford to buy when rates were at record lows.
— A quarter (25%) of homeowners who are buying another home this year won’t sell their current home. Of those who do plan on selling their home, most (56%) think they’ll regret giving up a mortgage with a much lower rate than what’s currently available.
— About four in five respondents are considering taking steps to get a lower mortgage rate, such as choosing a shorter loan term (37%), borrowing an adjustable-rate mortgage (34%) or purchasing mortgage discount points to buy down the rate (30%).
— Nearly three-quarters (73%) plan on shopping around with multiple lenders to compare rates. Of them, 40% will compare three lenders and 27% plan on shopping with two lenders. What’s more, 68% plan on refinancing to a lower mortgage rate in the future.
— The No. 1 priority for homebuyers when choosing a mortgage is having affordable monthly payments, with 35% of respondents saying so. That’s followed by getting the lowest interest rate possible (27%) and saving the most money over the entire loan term (21%).
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2 in 3 Homebuyers Are Waiting for Rates to Fall
Mortgage rates are about twice as high now as they were a little over a year ago, which has exacerbated housing affordability challenges ahead of the spring 2023 homebuying season. The average rate on a 30-year fixed mortgage hovered around 7% in March 2023, compared with about 3.5% at the beginning of 2022.
However, mortgage rates have declined slightly in recent weeks, and homebuyers in our survey seem hopeful that rates will fall further in 2023. Two-thirds of respondents (66%) are waiting for mortgage rates to drop before buying a home this year. Among them, 26% plan to wait until rates drop below 5% — something that’s highly unlikely to happen before 2024. And while rates are expected to drop in the second half of the year, they’re expected to stay above 6% this spring. Today’s homebuyers are extremely sensitive to fluctuating interest rates, and a significant drop in mortgage rates would likely bring more buyers — and tougher competition — back to the market. When rates pulled back in February, home sales (and home prices) rebounded with a vengeance.
“Buyers who are waiting for lower rates will likely have some company. And if they’re OK with competitive market conditions, that can be a fine approach. If you think you’re going to get a lower rate and still get the same market conditions that buyers have now, I think that’s a misconception.”
— Danielle Hale, chief economist at Realtor.com
The Answer to Rising Rates: Tighter Homebuying Budgets
Most 2023 homebuyers (62%) say they’ve had to reduce their home price budget due to the current rate environment. Among them, many have had to make sacrifices to find a home within that lower price:
— 39% are looking at homes that are smaller than they would like.
— 37% are looking at homes that need cosmetic repairs (e.g., kitchen remodeling, interior/exterior painting).
— 24% are looking at homes that need significant structural repairs (e.g., new roof, plumbing/electrical replacement).
One common thread is that homebuyers are surprisingly willing to uproot their lives in search of cheaper houses. Of those who cut their budget, 39% say they’re shopping for homes in a new city with a lower cost of living, and 32% have expanded their search to neighborhoods that they wouldn’t have considered otherwise. The majority of homebuyers overall (53%) say that the rise of remote work has changed where they’ll consider moving to.
But while home shoppers can try their best to cut costs by sacrificing square footage or moving farther outside the city, finding a home at the right price can still be a challenge. A third of 2023 homebuyers (34%) say they have to stretch their budget to find a livable home in the market where they’re buying, and a quarter (25%) say there are “no homes” within their budget in their desired market.
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Most 2023 Buyers Are First-Timers — and They’re Stressed About It
The majority of Americans buying a home this year are first-time homebuyers (61%), while 39% are repeat buyers. First-time buyers are a relatively large share of shoppers, but there’s a reason behind this trend: Most current homeowners have a lower mortgage rate than what’s available today, and many are holding onto a sub-3% rate (that we’re unlikely to ever see again). Meanwhile, home prices have surged in recent years, making it difficult for repeat buyers to find a comparable home with a similar monthly payment — at least, not without downsizing.
In fact, a quarter (25%) of buyers who currently own a home don’t even plan on selling it in order to buy their next one, suggesting that many homeowners want to keep their house and the record-low mortgage rate that comes with it. Among repeat buyers who do plan on selling their home, most (56%) think they’ll regret letting go of a low mortgage rate. On the other hand, first-time buyers aren’t tied down by the luxury of a more affordable mortgage.
Perhaps unsurprisingly, first-time homebuyers are more anxious about buying a home this year than repeat buyers. While 43% of first-time buyers are “very” or “extremely” stressed, far fewer repeat homebuyers feel that way, at 36%. Likewise, 15% of repeat buyers aren’t stressed at all, compared with 13% of first-timers. When asked if they regret not buying a home when mortgage rates were lower, 77% of first-time homebuyers say yes, while 23% say no. Here’s how that split breaks down:
— 29%: Yes, I was ready to buy a home earlier but didn’t.
— 24%: Yes, but I didn’t have enough money saved for upfront costs (e.g., down payment, closing costs).
— 24%: Yes, but the timing wasn’t right (e.g., couldn’t get out of a lease).
— 16%: No, I wasn’t ready to buy yet.
— 7%: No, I think now is a better time to buy even though mortgage rates are higher.
It makes sense why some first-time homebuyers weren’t able to buy a home in 2020 or 2021 when rates were at historic lows. A fifth (20%) of first-time buyers have been saving up to buy a home for less than a year, while 40% have been saving for one to two years.
A powerful minority of first-time buyers will be well-positioned to enter the housing market after spending years squirreling away money for a down payment and closing costs. About a quarter (24%) have been saving for three to four years, although just 16% have been saving for five or more years.
Homebuyers Seek Creative Ways to Combat High Rates
In today’s rate environment, many homebuyers view 7% mortgage rates as a temporary hurdle rather than a 30-year commitment. The majority of 2023 buyers (68%) say they plan on refinancing to a lower rate in the future. Many more plan on taking additional steps to lock in a lower mortgage rate, including:
Shopping around with lenders (73%). Comparing rates across multiple mortgage lenders can save homebuyers thousands of dollars per year, according to Freddie Mac research. By shopping around with at least four lenders when rates are volatile, buyers can potentially reduce their mortgage rate by a half-point — and save $1,200 per year. Most homebuyers in our survey plan on doing some comparison shopping. Of those that do:
— 27% will shop with two lenders.
— 40% will shop with three lenders.
— 19% will shop with four lenders.
— 14% will shop with five or more lenders.
Choosing a shorter loan term (37%). For buyers who are capable of handling higher monthly payments, borrowing a 15-year or 20-year mortgage is a practical way to get a lower interest rate. As an added benefit, a shorter mortgage repayment term helps borrowers get out of debt faster and save a huge chunk of change over the course of the loan.
Borrowing an adjustable-rate mortgage (34%). With a hybrid ARM, homebuyers are able to lock in a lower initial mortgage rate for a set period, typically the first three or five years of the loan. When the fixed-rate period expires, the mortgage rate and monthly payment can fluctuate — usually higher — once or twice per year. Although ARMs carry an inherent amount of risk, it can be mitigated for those who plan on refinancing or selling their home before the rate adjusts.
Purchasing mortgage discount points (30%). Borrowers can permanently buy down their rate with mortgage discount points. Each point costs about 1% of the total loan amount and can bring the rate down by about 0.25 percentage point. For example, two discount points on a $300,000 mortgage could cost $6,000 and bring the rate down from 6.5% to 6%. But for those who plan on refinancing anyway, the long-term savings may not offset the upfront cost of buying points.
More from U.S. News
Spring Mortgage Forecast: Rates Will Stay Above 6%
A Guide to Seller-Paid Mortgage-Rate Buydowns
How to Finance a Fixer-Upper Home
Two-Thirds of Homebuyers Are Holding Out for Lower Rates originally appeared on usnews.com
