Mortgage Rates – How Will They Impact The Real Estate Market?
One of my super guilty financial pleasures is the first each month logging onto my online mortgage statement. I absolutely love seeing the principal go down each month on my mortgage. I even calculated that each month I pay about $5 more a month in principal vs. interest. Don’t ask me why, but I get such a kick out of watching that outstanding principal go down. On top of that, I even round up my payments each month so that little additional amount starts to really add up.
I know you are asking yourself, what does that have to do with current mortgage rates? Sadly, probably not much. That said, when I do log on, I love seeing that my 30-yr mortgage is at 3.375%. It kinda kills me that I missed refinancing it even lower, but what once was a 4% mortgage I am now paying in the low 3% range. Over the past decade or so, while rates have been historically really low, this constant game of refinancing has been taking place. However, things are in the midst of changing.
For the first time since 2009, the average 30-yr fixed mortgage rates are over 5%, hovering around 5.25%. This is an insane jump over a really short period of time. The question at hand is what does this mean for the real estate market, where will rates go, and how do we keep this in perspective?
Mortgage Rates: Some Perspective
I know memory is super short when it comes to finances, but where does a 5.25% average mortgage rate put things in historical perspective? Well, I am glad you asked the question. Over the past 40 years, we’ve seen mortgage rates as high as 16% and as low as 3%, a pretty astonishing parody. The average 30-yr fixed mortgage rate is hovering a tick under 8% since 1971. For perspective’s sake, this means the current 5.25% rates are still almost 3% under historical averages. Additionally, since memory is still short, from 2006 to 2008 the average rates were in the 6% range.
I suppose I tell you all this to help you not “panic”. Of course, we all want as low a rate as possible. However, even if things creep up another 1-2% we are still hovering below historical averages. Guess this is a long way to suggest I don’t believe the end is here for the real estate market.
Now predictions are just that, predictions. The question I am sure on all of our minds is how much worse will it get in the near term, as who can really think that far ahead in real estate. I’ve done a lot of reading on this topic, and I’ve seen “experts” predict anywhere from 5-5.5% average rate by year-end. Now, if you ask me my personal prediction (as a “non-expert”) I look at what is going to continue to happen with interest rates.
We know inflation is still here, which means the Fed is going to keep ratcheting up rates until they can get it under control. This doesn’t 100% mean mortgage rates follow exactly, but it is as fair of a leading indicator as any. That said, I wouldn’t be shocked if, by year-end, we were up to 6-6.5% average mortgage rates. Again, not fun compared to what we’ve seen, but still historically below average.
What does this all mean?
There are a couple of ways to view this question so I’ll quickly hit on a few of them. For starters, what does this mean for the real estate market? Generally speaking, we would expect the insanely hot market slows down as rates increase. We would expect that initially, the buyer pool gets smaller to purchase homes, as fewer people are able to afford homes at the current asking prices due to increased payments.
The lagging indicator will be housing prices cool off a bit too. Thus, one would expect in the short term to take a little longer to sell their home, and in the long-term housing prices to tick down a bit. Is this gospel? Everything but the gospel in all honesty, as buyers may prove resilient as unemployment is super low and wage growth is on the rise. That said, buyer beware.
Next, the angle is what do you do if you get a mortgage at a 6% rate or higher? Especially, given the markets have been off this year? Do you start to overpay your mortgage more than investing? Now, this is an extremely circumstantial question as everyone’s situation is unique. In generality, I am still a big fan of continually buying into the markets, especially while they are on sale, and compartmentalizing your housing costs and your retirement funding.
Finally, what creative options does one have? Once upon a time, there was a huge housing crisis and there were a lot of people (cough, whistle, clap…..me) who had an interest-only mortgage. I learned my lesson and am not recommending them.
However, a 5/1 or 7/1 arm could be a great option. It provides you lower comparable rates to existing mortgage rates for a fixed period of time, then rates become adjustable. That said if you lock in, let’s say, a 7/1 arm, for the next 7 years you can pay a little more on the mortgage if you’d like, see where rates are in 7 years, or recognize your finances may be a lot stronger in 7 years thus paying more then won’t be such a financial hit.
Long story short
Long story short mortgage rates are on the rise for the foreseeable future. Don’t panic, but do plan as this is a great spot a good financial planner, and mortgage broker can help you plan what is best for your financial and housing needs.
As always stay wealthy, healthy, and happy.
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