Waiting for the Mortgage Rates to Come Down?

Waiting for the mortgage rates to come down before you buy a home may not be a good decision.

If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be devoured by the appreciated price increase.

As of 10/27/22, the 30-year fixed-rate was at 7.08% which is the highest level since April 2002.  If the rate drops to 5% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.

An increasingly, popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.96% rate for five years.  Then, refinance to a fixed-rate when rates come down.

Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.

Mortgage rates have increased over 3% in the first three quarters of this year.  Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates are substantial and could lower the monthly payment.

The lower adjustable-rate would save a buyer $323.90 a month during the first period of five years.  At any point during that period, they could refinance at better interest rate should it become available.  However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.

Mortgage rates have been low since the housing crisis that caused the Great Recession.  The government kept them low to build the economy.  Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster the economy which led to inflation which is what is causing the rates to increase currently.

When inflation is under control and back to acceptable levels, the rates should lower.

Home prices are a different situation.  The recent rise in mortgage rates has cause home prices to moderate because it affects affordability.  Inventories are still low and there a pent-up demand for housing from purchasers unable to buy during the pandemic.

This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise.  The rate of appreciation could even increase when rates come down which would also increase affordability and demand.

Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.  Reach out to me and we can discuss the options that are available. The lender you choose matters!

Housing affordability has declined dramatically in 2022 due to continued rising home prices and a three-percentage point jump in mortgage rates.  Based on the popularity of Google searches for “housing bust” or “housing bubble”, it could be surmised that buyers are anticipating relief, but they are probably not going to see it anytime soon.

Home price appreciation is moderating and is down from the 20% level experienced in 2021.  Some of the major industry prognosticators are estimating anywhere from 9% to 14% for 2022.  Interest rates are expected to continue to rise through the end of 2022 and could be at 7%.  Freddie Mac 30-year fixed-rate mortgage was 6.66% on October 6, 2022.

Even though homes currently for sale increased to 3.2 months in August 2022, it isn’t that much more than it was for the same month in 2021 when it was at 2.6 months.  Most markets are still entrenched in favor of sellers because a balanced market between buyer’s and seller’s is at six month’s supply.

While buyers may be feeling that a new home is no longer affordable, there are several affordability indexes that provide a baseline for objective measurement.  The National Association of REALTORS� produces a monthly index.  Affordability is determined by indicating a median income person/family can afford to purchase a median priced home with a 20% down payment based on a 25% qualifying ratio for monthly housing expense to gross monthly income.

The index is structured so that a value of 100 indicates that a family with the median income has exactly enough income to qualify for a mortgage on a median priced home.  When the index is above 100, the family has more than enough to qualify.

The NAR Housing Affordability Index for 2019, 2020, and 2021 was 159.7, 169.9 and 152 respectively.  It was 143.1 in January and by April had decreased to 108.1 and the preliminary number for June is 98.5.  The decrease in the index is directly affected by rising interest rates and home prices outpacing family income.

Home sales were seasonally adjusted in August to be 4.8 million which is down .4% from the previous month and down 19.9% from August 2021.  Lower sales are partly a function of a smaller pool of eligible buyers and concerns about a variety of economic conditions.

This may not sound like good news for buyers whether they are labeled first-time or move-up, but it is an objective view of the market.  It has become more expensive to buy a home now and will continue to increase in the future.

Getting into a house using whatever devices are necessary can at least put the momentum on your side.  Homes are appreciating faster than inflation and the fact that leverage improves the growth rate due to using borrowed funds to buy the home is also to the buyer’s advantage.

So, getting back to the original question “when will the market turn to make homes more affordable?”  It may not be a dramatic change but more likely, a subtle one.  Prices will moderate by still appreciating but not as much as in 2021.  Inventories will increase slightly but won’t affect price because the low supply has been almost a decade in the making and it will take time to reach balance in the market.

Mortgage rates are not as low as they were, but they never were before in the history of the U.S.  Millions of people had mortgages in the 1980’s that were as high as 18.5%.  Buyers financed the homes at the going market rate, sometimes with creative financing, and refinanced the properties later when the rates came down and the values had gone up.

Real estate is still a great hedge against inflation, and many times, the largest and best investment individuals have.  The Federal Reserve Survey of Consumer Finances found that homeowner’s net worth is 41 times greater than renters.