In the last year, mortgage rates have risen from 3% to 5%, and the question, “Is this the ideal time to buy?” is often on my customers’ minds. One of my customers is looking to downsize from his longstanding residence, but the alternatives available to him are startling. He cannot find a property to purchase or rent in San Antonio that is less costly than remaining there, no matter where he looks.
My customer told me that the interest rate on his existing loan is less than 3%. A substantial increase in his mortgage rate would be required to “downsize” to a more affordable home. Even if we sell his home for top cash, the issue is “where would he move, and at what cost?” It does not seem good for him to sell his house right now.
Fannie Mae experts predict a 9.7 percent drop in house sales next year because of the “lock-in effect,” which is the impact higher mortgage rates might have on the for-sale inventory. Households that have a 3% 30-year fixed-rate mortgage are reluctant to give it up for a mortgage closer to 5%, according to Fannie Mae Chief Economist Doug Duncan. As mortgage rates continue to rise, we at K&E Realty are finding ourselves in several tricky situations as we assist our customers in downsizing their homes. Here are some ideas about these issues:
Mortgage rate rises, when combined with rising property prices, cause specific issues for each kind of buyer. After months of rapid rise, 30-year conforming loan rates surpassed 5.5 percent for the first time in years a few days ago. Clients who have previously purchased a house recall a period when mortgage rates were higher than they are now. This may make guiding them through today’s rate hikes a little simpler. However, the volatility in the house loan market —where, in a matter of months, rates have climbed from around 3 percent to well over 5 percent— has been unsettling, particularly for first-time buyers. Any buyer in any market is accustomed to some degree of volatility, but the pace with which rates rose and then soared up surprised many.
Because of the changing climate, several of our buyers have questioned if it is the ideal time to buy now.
They are simply trying to find out what is going on, and we can assist. Clients periodically inquire about the possibility of waiting out the market. The last time we saw anything slightly like this was in 2006 and 2007, leading up to 2008, and they will be waiting a long time for the market to “normalize.” For one thing, by historical standards, a 5% mortgage rate is still inexpensive. For example, purchasers are still more qualified to take out loans than they were before the 2008 housing meltdown.
Focus on the big picture. When a customer expresses anxiety about mortgage rates, we present them with this historical background. A graphic showing the history of mortgage rates over the last few decades is sometimes requested by customers who are concerned that rates may rise from their recent historic lows. This graph illustrates the fact that a 30-year fixed-rate mortgage with a rate as low as 5% was almost unheard of before 2009. Throughout the 1980s, interest rates were in the double digits. We tell anyone looking to purchase the main house not to be alarmed by current interest rates. We do have customers that buy from us repeatedly, and we consider ourselves a valuable resource to them. They are the ones who make the ultimate call.
Push past the regret. It is common for our customers to feel regret for not securing a house sooner since they worry that they may have missed out on better prospects. Six months later, many who did not purchase wish they had done so. It is a mix of, “Damn, I wish I had bought that house,” and, “I wish I had bought that house to lock in that rate.” However, our customers have been unfazed by the higher mortgage rates. More people want to buy now rather than wait for higher rates in the future. People still want a house, they want to plant roots, and we have a lengthy list of purchasers who are ready to buy as soon as we locate anything. As a result, buyers are finding it more difficult to find a property that fits within their finances. According to Black Knight, a supplier of mortgage data and analytics, if interest rates rise half a percentage point — or home prices climb 5% — affordability will be at its lowest point ever. According to Black Knight, it has already happened in one-third of the nation.
Stay in touch with the lender. The need to lock in rates early has increased due to the fluctuating rate environment. Things are different now. To get the best deal possible, you need to establish a good working relationship with your lender. In addition to keeping an eye on our customers’ interest rates, we have had to keep an eye on the rate-lock procedure with the lender. For clients who may benefit from securing a mortgage rate sooner rather than later, it is recommended that they do not put off locking in their rate. We’ve suggested to customers that they inquire with their lenders about adjustable-rate choices, and a few have taken our advice in the last few weeks. People who want to refinance or relocate in the next several years may use these products to lock in a more reasonable monthly payment while they wait for their mortgage to be refinanced or sold.
Embrace the challenge. The difficult market circumstances have made it more difficult for us agents, brokers, and lenders to impress customers. Options were better for the average customer earlier in the epidemic. Prices were rapidly increasing. Customers who did not believe they were getting a fair bargain on a home were practically assured of acquiring a record low mortgage rate. All those elements have subsequently altered for the worst from the buyer’s standpoint.
There is more to consider than the simple idea of waiting to buy or waiting to sell, let our Knowledge and Experience be your guide and let’s find the best strategy for your specific case. Call our office for a free consultation (210) 897-2070.