When it comes to buying or selling a home there are many factors you should consider. Where you want to live, why you want to buy or sell, and who will help you along your journey are just some of those factors. When it comes to today’s real estate market, though, the top two factors to consider are what’s happening with interest rates & inventory.
Interest RatesMortgage interest rates have been on the rise and are now over three-quarters of a percentage point higher than they were at the beginning of the year. According to Freddie Mac’s latest Primary Mortgage Market Survey, rates climbed to 4.72% for a 30-year fixed rate mortgage last week. The interest rate you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power. Purchasing power, simply put, is the amount of home you can afford to buy for the budget you have available to spend. As rates increase, the price of the house you can afford to buy will decrease if you plan to stay within a certain monthly housing budget. The chart below shows the impact that rising interest rates would have if you planned to purchase a $400,000 home while keeping your principal and interest payments between $2,020-$2,050 a month. With each quarter of a percent increase in interest rate, the value of the home you can afford decreases by 2.5% (in this example, $10,000). Experts predict that mortgage rates will be over 5% by this time next year.
InventoryA ‘normal’ real estate market requires there to be a 6-month supply of homes for sale in order for prices to increase only with inflation. According to the National Association of Realtors (NAR), listing inventory is currently at a 4.3-month supply (still well below the 6-months needed), which has put upward pressure on home prices. Home prices have increased year-over-year for the last 78 straight months. The inventory of homes for sale in the real estate market had been on a steady decline and experienced year-over-year drops for 36 straight months (from July 2015 to May 2018), but we are starting to see a shift in inventory over the last three months. The chart below shows the change in housing supply over the last 12 months compared to the previous 12 months. As you can see, in June, July, and August, inventory levels have started to increase as compared to the same time last year. This is a trend to watch as we move further into the fall and winter months. If we continue to see an increase in homes for sale, we could start moving further away from a seller’s market and closer to a normal market.
Bottom LineIf you are planning to enter the housing market, either as a buyer or a seller, let’s get together to discuss the changes in mortgage interest rates and inventory and what they could mean for you.
Mortgage interest rates, as reported by Freddie Mac, have increased by close to a quarter of a percent over the last several weeks. Freddie Mac, Fannie Mae, the Mortgage Bankers Association, and the National Association of Realtors are all calling for mortgage rates to rise another quarter of a percent by next year. In addition to the predictions from the four major reporting agencies mentioned above, the Federal Open Market Committee recently voted “unanimously to approve a 1/4 percentage point increase in the primary credit rate to 2.75 percent.” Historically, an increase in the primary credit rate has translated to an overall jump in mortgage interest rates as well. This has caused some purchasers to lament the fact that they may no longer be able to get a rate below 4%. However, we must realize that current rates are still at historic lows. Here is a chart showing the average mortgage interest rate over the last several decades:
Bottom LineThough you may have missed the lowest mortgage rate ever offered, you can still get a better interest rate than your older brother or sister did ten years ago, a lower rate than your parents did twenty years ago, and a better rate than your grandparents did forty years ago.
I Would Buy Now!
- The cost of waiting to buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.
- Freddie Mac predicts interest rates to rise to 5.2% by the third quarter of 2019.
- CoreLogic predicts home prices to appreciate by 5.1% over the next 12 months.
- If you are ready and willing to buy your dream home, find out if you are able to!
Mortgage Interest RatesWhat you pay on your home mortgage interest rate has a direct impact on your monthly payment; the higher the rate, the greater the payment will be. That is why it is important to know where rates are headed when deciding to start your home search. Below is a chart created using Freddie Mac’s U.S. Economic & Housing Marketing Outlook. As you can see, interest rates are projected to increase steadily over the course of the next year. The difference between a 3.5 mortgage rate and a 5.2 mortgage rate is $100 per month for every $100,000 of mortgage for the 360 payment life of the loan!
How Will This Impact Your Mortgage Payment?Depending on the amount of the loan that you secure, a half of a percent (.5%) increase in mortgage rate can increase your monthly mortgage payment significantly. According to CoreLogic’s latest Home Price Index, national home prices have appreciated 6.2% from this time last year and are predicted to be 5.1% higher next year. If both the predictions of home price and mortgage rate increases become a reality, families would wind up paying considerably more for their next homes.
Bottom LineEven a small increase in mortgage rate can impact your family’s wealth, so don’t wait until next year! Let’s get together to evaluate your ability to purchase your dream home now.
Future home prices are at the top of everyone’s minds. Can they maintain their current pace of appreciation? Will rising mortgage rates negatively impact home values? Will the next economic slowdown cause prices to crash? Let’s try to answer these questions based on what has happened in the past and current real estate market.
The Impact of Rising Interest RatesWe explained earlier this year that rising mortgage rates have not negatively impacted home prices in the past and probably wouldn’t this time either. Freddie Mac’s comments were very direct:
“In the current housing market, the driving force behind the increase in prices is a low supply of both new and existing homes combined with historically low rates. As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices.”They were correct. So far this year, home values have continued to appreciate above normal historic percentages and it appears the gradual increase in rates has had little impact on prices.
The Impact of an Economic SlowdownMany people fear that when the economy turns, we may see the same depreciation in home values as we did a decade ago. However, we recently reported that the same group of economists, real estate experts, and investment & market strategists who predicted the next recession will occur in the next 18-24 months have also projected that house prices will continue to appreciate for the next five years, albeit at smaller percentages.
It Comes Down to Supply and DemandAs always, home prices will be determined by the demand to purchase compared to the available inventory of homes for sale. For the last six years, demand has far exceeded the available supply. This has resulted in the average annual appreciation to top 6% since 2012. That is far greater than the historic norm of 3.6% annual appreciation that we saw prior to the housing boom. There are currently small signs that housing inventory is slowly beginning to increase. The months supply of houses for sale matched last year’s numbers for the last two months after 37 consecutive months of decreasing inventory. New construction data has also shown positive signs that inventory will be increasing. As inventory begins to meet demand, we will see appreciation return to more normal levels. We are already seeing projections coming in lower than the 6.2% annual average we have seen more recently. CoreLogic is predicting that home values will appreciate by 5.1% over the next twelve months and the Home Price Expectation Survey calls for values to increase by 4.2% in 2019.
Bottom LineMark Fleming, Chief Economist at First American, explained it best:
“We’re seeing the first indications that price appreciation may be slowing, but the underlying fundamental housing market conditions support a natural moderation of house prices rather than a sharp decline.”
There are some people who have not purchased homes because they are uncomfortable taking on the obligation of a mortgage. Everyone should realize, however, that unless you are living with your parents rent-free, you are paying a mortgage – either yours or your landlord’s. As Entrepreneur Magazine, a premier source for small business, explained in their article, “12 Practical Steps to Getting Rich”:
“While renting on a temporary basis isn’t terrible, you should most certainly own the roof over your head if you’re serious about your finances. It won’t make you rich overnight, but by renting, you’re paying someone else’s mortgage. In effect, you’re making someone else rich.”With home prices rising, many renters are concerned about their house-buying power. Mark Fleming, Chief Economist at First American, explained:
“Over the last three years, renter house-buying power has increased fast enough to keep pace with house price appreciation, so the share of homes that a renter can afford to buy has remained the same since 2015. Although mortgage rates are expected to rise, they are still low by historic standards, and real household incomes are the highest they have ever been. Assuming this trend continues, our measure of affordability, which takes into account income, interest rates, and house prices, indicates that homeownership is still within reach for renters.”As an owner, your mortgage payment is a form of ‘forced savings’ which allows you to build equity in your home that you can tap into later in life. As a renter, you guarantee the landlord is the person building that equity. Interest rates are still at historic lows, making it one of the best times to secure a mortgage and make a move into your dream home. Freddie Mac’s latest report shows that rates across the country were at 4.51% last week.
Bottom LineWhether you are looking for a primary residence for the first time or are considering a vacation home on the shore, now may be the time to buy.
- Interest rates are projected to increase steadily heading into 2019.
- The higher your interest rate, the more money you end up paying for your home and the higher your monthly payment will be.
- Rates are still low right now – don’t wait until they hit 5% to start searching for your dream home!
Since the beginning of the year, mortgage interest rates have risen over a half of a percentage point (from 3.95% to 4.52%), according to Freddie Mac. Even a small rise in interest rates can greatly impact a buyer’s monthly mortgage payment. First American recently released the results of their quarterly Real Estate Sentiment Index (RESI), in which they surveyed title and real estate agents across the country about the impact of rising rates on first-time homebuyers. Real estate professionals around the country have not noticed a slowdown in demand for housing among young buyers; nearly 93% of all first-time homebuyers last quarter were between the ages of 21-35. The largest share of buyers (51%) coming from those aged 26-30. First American’s Chief Economist Mark Fleming had this to say,
“On a national level, mortgage rates would need to hit 5.6%, 1 percentage point above the current rate, before first-time homebuyers withdraw from the market.”
So, what is slowing down sales?According to the last Existing Home Sales Report from the National Association of Realtors, sales are now down 3.0% year-over-year and have fallen for the last three months. If rising interest rates aren’t to blame, then what is? Fleming addressed the cause, saying that:
“The housing market is facing its greatest supply shortage in 60 years of record keeping, according to the Federal Reserve Bank of Kansas City. The ongoing housing supply shortage will make it difficult for first-time buyers to find a home to buy, even when they are financially ready.”Bottom Line First-time homebuyers know the importance of owning their own homes. A spike in interest rates is not going to keep them from buying this year! Their biggest challenge is finding a home to buy!
Cost Across Time
- With interest rates still around 4.5%, now is a great time to look back at where rates have been over the last 40 years to determine cost across time.
- Rates are projected to climb to 5.1% by this time next year according to Freddie Mac.
- The impact your interest rate makes on your monthly mortgage cost is significant!
- Lock in a low rate now while you can!