Nate Lowenstein has been shopping for a home in Los Angeles, on and off, for more than a year. His search has been stymied by a stubbornly low roster of homes on the market and the hurdles that come with it: multiple competing bids and higher prices.
"It's not a great market, from a buyer's perspective," said Lowenstein, a lawyer. "The one good thing is that interest rates were quite low."
As recently as last summer, homebuyers had ultra-low mortgage rates on their side. It was good news for any borrower, but especially for those in expensive housing markets like Los Angeles, Boston and Seattle.
That was then. While mortgage rates remain very low by historical standards, they've risen sharply over the past couple of months, with the average rate on a 30-year fixed-rate mortgage reaching 4.2 per cent this past week. The rate got as high as 4.32 per cent a week before that, its highest level since 2014 and well above the past year's average of 3.65 per cent.
Economists predict that mortgage rates will continue to climb this year, just one of the trends that suggest that 2017 will be a more challenging year for homebuyers.
"With higher mortgage rates, you're increasing the cost, challenging the budgets, challenging the ability to qualify and, as a result, likely reducing somewhat the pool of potential buyers," said Jonathan Smoke, chief economist for Realtor.com.
So far, the rate increases haven't begun to worry Lowenstein, who is in the market for a house with at least three bedrooms in L.A.'s affluent west side. His budget: Between $1.6 million and $1.8 million.
"We're not priced out yet," Lowenstein said. "But if it goes up to 5 per cent or 6 per cent, at some point we would be."
Long-term mortgage rates tend to track the yield on the 10-year U.S. Treasury note. The yield goes down when investors bid up bond prices, as they did following last summer's vote in Britain to exit the European Union. The move sent long-term mortgage rates tumbling as low as 3.41 per cent.
The reverse happened after Election Day. Investors bet that a Republican-controlled White House and Congress will have a clear path to implement policies that will drive inflation and interest rates higher. A sell-off in U.S. bonds drove the yield on the 10-year Treasury note in mid-December to the highest level in more than two years, and mortgage rates have floated higher with the tide.
But will they continue to do so?
Smoke predicts mortgage rates will reach 4.5 per cent in 2017. Other economists expect rates to remain above 4 per cent but not to go beyond 5 per cent this year. That range would mean mortgage rates that would be low compared with the past decade.
Average long-term mortgage rates were above 6 per cent during the height of the last housing boom, and they hadn't hit 5 per cent before 2008.
So someone looking to buy a home in the next few months doesn't need to panic, said Svenja Gudell, chief economist at Zillow, a real estate information company.
"My advice to buyers would be to not freak out and feel a sense of urgency," she said. "If you aren't able to buy a house at 4.5 per cent, you probably weren't able to buy a house at 4 per cent."
The stakes are a bit higher for buyers in expensive markets, where housing can eat up a much larger share of household income.
If mortgage rates continue to climb, there are moves that would-be homebuyers can make to better offset some of the higher borrowing costs.
Consider lowering the interest rate by paying a fee to the lender up front, something known as buying down the interest rate. Or go with an adjustable-rate mortgage, which has a low fixed rate for a few years, typically five or 10, then adjusts to a higher rate.
Another move: Ask the seller to pay the buyer's closing costs. That can free up more cash for buyers to manage the higher borrowing costs.
Higher mortgage rates could have one silver lining: As some buyers are priced out, sellers may have to be more flexible on prices. Over time, that could help stem home prices.
Low inventory and strong demand helped increase prices in 2016 at the fastest pace in 10 years, according to an analysis by Zillow. The company predicts that U.S. prices will increase about 3 per cent on average in 2017, down from a gain of about 6.5 per cent last year.
Declining affordability is one reason the National Association of Realtors predicts that homes sales will rise 2 per cent this year. Compare that with the 15 per cent increase in sales through the first 11 months of 2016.
Even buyers who can weather higher mortgage rates may have to brace for a long home search this year.
The inventory of homes for sale is expected to be tighter in 2017 than it was last year. While it varies by market, nationally, fewer than 1.9 million homes were on the market in November, down 9 per cent from a year earlier, according to the NAR.
Homebuilders aren't building enough homes to make up for the shortage, citing a lack of ready-to-build land, labour shortages and rising building materials costs.
Buyers can also expect more competition in 2017 as millennials continue to transition from renting to homeownership, particularly in more affordable markets in the Midwest and South.
First-time buyers accounted for roughly 32 per cent of home purchases through the first 11 months of 2016, up from 30 per cent in the same period a year earlier, according to the NAR.
Affordability remains a hurdle for many first-time buyers, but qualifying for financing may get a bit more accessible in 2017.
Fannie Mae and Freddie Mac increased the limit of the mortgages they will buy from lenders on Jan. 1 to $424,100 from $417,000. In more expensive markets, the mortgage giants will accept loans as high as $636,150, up from $625,500.
Banks may also have an incentive to loosen lending standards if rising mortgage rates continue to dampen demand for mortgage refinancing.