Buying Advice

Inflation, Mortgage Rates, & Property Values… (Part 2)

If you have not had the opportunity to see the previous article from last October, please visit Part 1 here.

Interest rates are still on the rise, and the ability for buyers to afford to purchase a home is becoming more difficult.  We are starting to see more price reductions and properties being on the market longer, with fewer showings, since there are fewer buyers.  It is increasingly more difficult to qualify for a home mortgage.

Here are a few specific points:

Reported in Newsweek today:

“The average 30-year U.S. mortgage rate surged to 7.1%, reflecting higher Treasury yields and expectations that the Federal Reserve will continue to raise its benchmark rate and keep it there until inflation recedes, Mortgage News Daily reported Thursday”.[1]

“Meanwhile, mortgage buyer Freddie Mac reported Thursday that the average on the benchmark 30-year rate also rose, but to 6.65% from 6.5% last week. The average rate a year ago was 3.76%”.[2]

Ouch!  So, how does this translate into actual increase in a mortgage payment?

A $500,000 mortgage over 30 years at 3.76% comes to approximately $2,318.00 per month.

A $500,000 mortgage over 30 years at 6.65% comes to approximately $3,210.00 per month.

That is a difference of $892.

So what may we expect in the near future?

There seems to have been promising economic indication last month that they were making progress against inflation with existing rate increases.  It appears that during January, stores were selling leftover Christmas stock at a huge discount.  Some of the indicators appear to have not reflected the true nature of the economy.

Now, it looks like the Fed needs to continue to increase interest rates. One of the issues is that approximately 40% of existing mortgages are pandemic period, low interest rate mortgages that are outside the control of the Fed. It is possible that the Fed will lean towards more rate increases to try to curb inflation, to the extent of increasing unemployment. Rates go up, company’s expenses go up, sales are down and employees are laid off, so there are fewer people able to purchase goods, and prices finally lower.

It almost seems to be less painful having inflation than the level of pain the cure will cause.

Currently, the Fed Funds Rate is at 4.75%. A year ago it was 0.25%[3]

What will the mortgage interest rates be at once the Fed accomplishes its goal of curing inflation? Will there be any buyers that qualify at that point?

It is almost certain that the number of qualified buyers will be reduced, and prices will continue to decline.

At any rate, as predicted in the previous article,

Now May Be the Perfect Time To Consider Selling Your Home!

[1] Newsweek Finance Thursday, 02 March 2023 03:22 PM EST

[2] Newsweek Finance Thursday, 02 March 2023 03:22 PM EST


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Now Here Is The Flip Side…

This may also be the best time for quite a while for Buyers to purchase a new home.

Consider this scenario:

A buyer waits for the market “to crash.” He has targeted a home in the $1,100,000 range. The buyer has $500,000 as a down payment.

The seller drops the price by $100,000.

Now the buyer feels it is time to buy, so off to the bank to fill out a mortgage application.

Problem is…the mortgage interest rate is now at 8%.

A $600,000 mortgage (the original price at $1,100,000 with $500,000 down) at 3.76% would have been approximately $2,782.

The price reduced scenario shows a $500,000 mortgage costing $3,669 per month at the 8% rate with $500,000 down.

It costs the buyer an extra $887 per month to purchase a home that had a $100,000 purchase price reduction.

Even though the home’s purchase price is reduced by $100,000, the mortgage payment is higher due to the higher interest rate, and harder to qualify for.

Waiting could be an unwinnable race with rising interest rates offsetting property price reductions.

It is very possible that we will not see any pivot towards rate cuts this year.

The Fed has gone from 0.25% to 4.75% in one year.

Interest rates have essentially doubled in one year.

What if this trend continues? We have seen this in the past. Interest rates were approximately 12% in 1982.  Remember those Carter years?

If rates continue to rise, it may be that…

Now May Be the Perfect Time To Consider Purchasing Your Home!

It is almost impossible to gauge the market with enough precision to sell at the absolute peak. It is important to be able to identify trends that could indicate direction of the market and to be able to sell as close to the peak in the market as possible.

It is almost impossible to purchase at the absolute dip, and there is a very real risk of interest rates rising if a buyer waits much longer

If you desire to sell your home, or if you desire to purchase a home, please contact me to discuss the best method to accomplish your goals!

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