Navigating the Home Buying Market When Rates Rise | Business
Mortgage interest rates have skyrocketed this week. And experts warn they are unlikely to climb to 4% as the US Federal Reserve struggles to tackle the highest inflation in nearly 40 years.
Rising mortgage rates, along with limited inventory and record home sale prices will affect buyers’ ability to buy a home.
The Fed is also stopping buying mortgage-backed securities (MBS) and US Treasuries, which it bought during the pandemic to stimulate the economy. According to the minutes of the Federal Open Market Committee’s December 15 meeting of the Federal Reserve, committee members expect the purchase of mortgage-backed securities to end in March and the rate of federal funds increases in June.
What do rising mortgage rates mean for homebuyers?
Higher monthly payments
Potential buyers should look to buy earlier in the year rather than later to take advantage of lower rates. For most of 2021, 30-year mortgage rates have averaged around 3%, but have been rising every week since we entered 2022.
The Mortgage Bankers Association estimates that with the expected rate increases, 30-year mortgages will be closer to 4% by the end of 2022. The resulting higher monthly payment could shut some buyers out of the market.
For example, a buyer of a $400,000 home with a 20% down payment would have a mortgage of $320,000. The monthly payment with a 30-year 3% mortgage would be $1,349. However, with a 30-year 4% mortgage, the monthly payment would be $1,528. The additional amounts would be $179 per month or $2,148 per year.
Some buyers may not be able to afford the higher monthly payments or qualify for the higher rate mortgage. However, these interest rates are still close to historic lows. According to Fed data, the 30-year mortgage rate was still above 4% as recently as 2018.
Therefore, it may be a good idea to go ahead with your purchase if you can afford the higher payments. Plus, for existing homeowners wondering when to refinance their mortgage, now may still be a good time.
According to the Mortgage Bankers Association, approximately 6 million homes were sold in 2021. Average home prices rose 15.3%, with a median home price of $362,000. Their housing market forecast for 2022 calls for a modest decline of 2.5% in house prices.
They believe rising mortgage interest and high inflation will slightly, but not severely, slow the pace of home sales.
The question is whether buyers can find stocks in today’s high pressure market. real estate agent.com states that existing homes have a 1.8 month supply, below the typical 6 month period. Freddie Mac estimates that the country would need 4 million homes to meet current demand.
The inventory shortage is a perfect storm between years of under-construction of new homes and millennials poised to hit the real estate market as first-time buyers. The result is the lowest inventory in forty years.
Low inventory, high pace of sales and fierce competition for homes can prevent buyers from finding a home. However, homes selling well above listing prices are the norm in many parts of the country.
According to Bankrate, in California and Colorado, about 60% of homes are selling above their list price. Homes sell before they even hit the market. As a result, first-time buyers find themselves stuck in the rental market, driving up rental prices.
Zumper’s Annual Rentals Report shows median rental prices rose 11.6% for a one-bedroom apartment and 13.6% for a two-bedroom apartment in 2021. The combination of a low inventory, rising mortgage rates and rising prices are reasons potential buyers might want to buy sooner rather than later.
Look in different regions
Location has always been part of the real estate equation. But now more than ever, fulfilling the dream of homeownership can mean touring the country.
Prices vary widely across the country. Moving to a more affordable area and using a geographic arbitrage strategy can help new buyers purchase a home. Some regions may also have a larger inventory, with less competition.
With the growing acceptance of remote work, workers no longer have to travel to the office. These workers are not tied to their current region and may move to other localities based on different lifestyles and quality of life desires. Many of those who used to work in the cities and who rented are now buying houses in the suburbs since they no longer commute.
According to the Federal Reserve Bank of St. Louis, in 2021 the cheapest state to buy a home was West Virginia, with an average price of $117,765. The highest average price was the District of Columbia, with an average selling price of $691,997.
With a 20% deposit in each state and a thirty-year mortgage at 3.730%, the monthly mortgage payment would be $579 in West Virginia and $3,079 in the District of Columbia. This $2,500 difference does not take into account property taxes, HOA or home insurance.
Potential buyers should be pre-qualified before looking at homes to help determine their price range and how it fits their budget. Consumers can’t afford to waste time looking at properties outside their price range in today’s hot real estate market. An experienced real estate agent and mortgage broker can offer expertise to make the search less painful.
Buyers should provide a larger down payment to make their offer competitive in a tight market and help make their mortgage payment affordable. For example, suppose you save an additional $10,000; then the larger down payment will lower the loan-to-value (LTV) ratio, possibly resulting in a lower mortgage rate.
Lenders generally consider a lower LTV ratio to be less risky because buyers will have more equity in their home. Funds must be in account for at least 60 days to demonstrate ability to finance purchase.
Comparing different mortgage products is essential and will vary depending on finances, income and credit rating. Although variable rate mortgages may be attractive, consumers should consider how the interest rate may change after the fixed term portion of the mortgage.
Once the term resets, borrowers may get a sticker shock if the initial low interest rate rises. The initial term is set below the market rate on a similar fixed rate loan.
Adjustable rate mortgages may be best for those who cannot qualify for a traditional mortgage and are planning to refinance or sell for a fixed term. However, the risk of an ARM resetting increases higher in a period of rising mortgage rates.
The chairman of the US Federal Reserve said that there is “…there is good leeway to raise interest rates…”. This statement suggests that mortgage rates will likely trend higher in 2022.
Buyers may have to wait
Traditionally, the real estate market has more homes listed in the spring. These already built homes increase inventory and allow first time buyers to enter the market. For 2022, new construction is a significant variable.
In 2021, labor shortages, high material prices and COVID-19 outbreaks caused delays. These same issues are expected in 2022. However, if builders ramp up housing starts and home completions in 2022, inventory could rise. Higher inventories could stabilize prices in some regions.
Buyers should remain resilient in the competitive housing market. Flexibility and preparation are key. A buyer’s planned schedule may not work out as planned with so many unpredictable variables, but they can persevere and achieve the goal of home ownership over time.