Is FOMO the Reason Rising Mortgage Rates Aren’t Driving Buyers Away?

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  • Mortgage rates have risen sharply since the start of the year.
  • Surprisingly, buyers have yet to pull out of the market in spite of much higher borrowing costs.

Mortgage rates are rising but buyer demand isn't waning. What gives?

Last year, home prices sat at record highs as buyers scrambled to get into the housing market. But there's a reason buyer demand was so strong in 2021, and it's that mortgage rates spent the year sitting at competitive levels.

That's not the case this year. Mortgage rates have been rising sharply since the start of 2022. As of this writing, the average 30-year loan is at almost 4.85%. And the average 15-year loan is just shy of 4%. By comparison, the 30-year mortgage didn't hit 4% in 2022, and the 15-year loan stayed under 3% all year.

Given the way mortgage rates have been rising, you'd think buyers would be pulling out of the housing market at a rapid clip. But that hasn't happened so far.

In fact, as of February, home prices were still up 15% on a year-over-year basis, according to the National Association of Realtors. And while it's too soon to have comparable data for March, there's no indication that home prices have taken a notable dive.

If you find that surprising, you're probably not alone. But there's one big factor that could explain why buyer demand is holding steady in spite of the fact that borrowing rates for homes are so much higher.

It's all about FOMO

In an age of social media, FOMO -- fear of missing out -- can drive consumers to do a lot of things, like making impulse purchases and taking on expenses that don't really fit their budgets. FOMO could also be the reason why home buyers aren't pulling out of the housing market despite much higher mortgage rates.

Right now, home prices are inflated. But sustained buyer demand could boil down to a fear of missing out on today's prices and facing higher prices in the future.

Or, to put it another way, buyers might feel that home prices still have room for growth -- and want to get in before they rise even more. Those looking for a home may be willing to accept higher prices and borrowing rates, even though that's not financially advantageous.

That line of thinking is understandable. But it may not be accurate.

Today's higher home prices are a function of low inventory and high demand. At some point, more homes are apt to hit the market. And once that happens, prices should start to come down.

Also, since today's home values are so inflated, at this point, there just isn't much room for growth. Buyers shouldn't worry so much about rising home prices. And buyers should strongly consider waiting until property values come down to purchase a home given how high mortgage rates are right now.

Will mortgage rates continue to climb?

There's reason to believe mortgage rates will continue to rise in 2022. For one thing, they spent so much time at record lows that they were bound to go up. But also, the Federal Reserve has several rate hikes planned for 2022. The Fed doesn't set mortgage rates, but when it raises the federal funds rate, mortgage rates tend to follow suit.

Now ideally, mortgage rates won't continue to rise at the same rapid pace we've seen so far this year. But they might still rise steadily. Buyers today may want to sit tight so they don't get caught in a double whammy situation where they're stuck with a high home purchase price and a high interest rate on a mortgage.

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