Retreat, not Panic: How Home Buyers Reacted to the Rate Spike

Posted: June 27, 2013 in Uncategorized
June 26, 2013 Wall Street Journal

By Glenn Kelman

“The long-awaited day of reckoning is here,” Chris Farrell wrote in Forbes this week. “The era of historically low interest rates is over.” Mortgage interest rates began to increase in the first week of May, going from 3.35% to the headline-grabbing rate of 4.36% as of Friday.

What happened? Last Wednesday, Federal Reserve Chairman Ben Bernankeannounced that if the economy continued to improve, the government would stop buying $85 billion in bonds each month by mid-2014. The stock market lost 3% of its value in three days.

Everyone wants to know how American home buyers will react to the rate increase, but it usually takes months for people to buy a home, and months more for records of such sales to become public.

In the meantime, the real estate industry remains bullish; confidence among home builders hit a seven-year high last week.

At Redfin, we see a slightly different trend. As a company of technology-powered real estate agents, we’re able to track how more than 6,000 of our home-buying clients across 25 U.S. markets are reacting in real time, touring homes and writing offers in greater or lesser numbers.

Our data from this weekend suggest that buyers already in the market remain engaged, but new buyers may be stepping back. Comparing this weekend to the average of the last three weekends, we found that:

The number of customers making an offer on a home increased 4%.

The number of customers touring a home increased 1%.

The number of new customers contacting a real-estate agent decreased 11%.

This reaction isn’t dramatic, but it is a continuation of a largely unheralded softening in the market. For the first time since November, the percentage of homes going under contract in less than two weeks began to decrease in May, from 33% to 32%, a reversal of an important trend. Bidding wars peaked in February at 79% of the homes bid on by Redfin agents, falling in May to 69%.

We aren’t surprised that the growth in offers actually accelerated. It turns out that rising rates probably lured some dawdling buyers, suddenly concerned that money was getting more expensive, to jump into the market. Yes, compared to the same weekend last year, the growth in Redfin customers making offers this past weekend actually increased, but the eight-week trend has been softening:

We saw a similar pattern with customers touring homes, an uptick this weekend in the growth compared with last year of home-buyers touring homes, but in the context of a four-week softening in demand:

Most markedly, the number of new customers entering the market has begun to slow, returning to growth rates we saw in the first four months of the year:

This tells us that rising rates will temper the market’s growth. As Redfin agent Landon Nash noted about one of the wealthiest of U.S. markets, San Francisco, “Rates are still historically low, but some of my buyers who were already close to their max price are now priced out because of the rate jump.”

We now see some folks belatedly jumping into the market, but more pulling back. Given how fast prices have been rising and how few homes there have to been to buy, that might be a good thing. “All my clients have told me they are still going to purchase,” said Redfin Los Angeles-area agent Loren Bennett. “Many feel that we have been in a small bubble that the rate increase may actually deflate.”

Some buyers have been spurred to action by the rate increase. “I had two tours this weekend with first-time clients who said they have been looking online for awhile and decided to jump in and get serious, touring homes to buy now that they feel rates are going up,” said Redfin Orange County agent Katrina Jauregui.

“It has definitely registered with consumers,” said Redfin Baltimore agent Casie Yarn. “A client who just got into contract called Friday in a near-panic about rates going up. She kept asking if I thought that they’d go back down any time soon. She was actually considering two different lenders and made a decision under pressure to lock in with one at 4.25% before rates went up more.”

But more than a few agents noticed a significant downturn in demand. “It’s like the market just died,” said Bree Al-Rashid, a Redfin agent who lists homes in the Seattle area. “In neighborhoods where I would expect 5–10 offers on a median-priced home, I might be getting one, two if I’m lucky. I’m preparing sellers very differently than I did even a couple of weeks ago.”


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