DISCLAIMER: These are NOT my personal views and do NOT constitute financial advice.
Mortgage rates have increased significantly since the beginning of the year. Each Thursday, Freddie Mac releases its Primary Mortgage Market Survey. According to Bankrate.com, the average 30-year fixed-rate mortgage has risen from 3.22% at the start of the year to 4.48% as of 3/20/2022.
This is important to note because any increase in mortgage rates changes what a purchaser can afford, and this has a huge impact on overall demand and just how much a seller can get for their home. To give you an idea of how rising mortgage rates impact your purchasing power, see the table below:
As you can see, it’s not all about the price of a home. Many of the clients I work with say that homes are too expensive for them, but the reality is that in the past couple of months, home prices haven’t changed much here in Frederick County and Northern Virginia- but the monthly payment has gone up significantly! This is the cost of waiting, and it could get even more expensive to wait if rates continue climbing as many expect.
How Can You Know Where Mortgage Rates Are Headed?
On Wednesday 3/16/2022, the Federal Reserve raised a bedrock interest rate, and as a result, mortgage interest rates are likely to increase. This move was done to combat rising inflation amongst other things. Between <4% unemployment, inflation almost at 8%, and the war in Ukraine, these could become large movers of the mortgage rates, and most experts agree it is likely to head upwards.
As a real estate agent, one of the biggest questions I get asked is how rising interest rates are going to impact the housing market. Usually, it’s pretty clear cut: interest rates go up, costs on purchasing a home go up, and demand decreases. This leads to slower home appreciation and fewer investors, meaning fewer homes for sale and they take longer to sell.
While it’s always difficult to know exactly where mortgage rates will go, another great indicator of where they may head is by looking at the Federal Reserve. Understanding the mechanics of the treasury yield isn’t as important as knowing that there’s a correlation between how it moves and how mortgage rates follow. Here’s a graph showing that relationship over the last 50 years:
Why 2022 Could Be Different
Even with rising rates, the real estate market has been so hot that homes are still in high demand and are selling incredibly fast and with favorable terms to sellers. It’s been this way for a while, and many buyers have been waiting for quite some time to sell and won’t be deterred so easily. As one client of mine said, “4% is a hell of a lot less than the interest rates on my first home purchase!” It’s true- before 2011, rates under 5% were rare and even before the pandemic they were pretty commonly between 4 and 5%. On top of that, many sellers want to keep the lower mortgage rate they locked in, despite perhaps outgrowing their home or desiring a relocation for retirement, work, or lifestyle.
For sellers trying to get the most for their home, this could be the “Top,” and potentially the best time to sell your home to cash out on the 20%+ equity gains in the past year to 2 years.
For buyers, the new rates could mean less competition and stabilized prices ahead. But it could also mean significant increases in monthly payments if the trend continues. The image below that I created a few months ago certainly makes a lot of sense now that almost the exact scenario has unfolded.
Bottom Line
Forecasting mortgage rates is very difficult. As Mark Fleming, Chief Economist at First American, once said:
“You know, the fallacy of economic forecasting is don’t ever try and forecast interest rates and or, more specifically, if you’re a real estate economist mortgage rates, because you will always invariably be wrong.”
However, if you’re either a first-time homebuyer or a current homeowner thinking of moving into a home that better fits your changing needs, understanding what’s happening with the Federal Reserve, 10-year treasury yield, and mortgage rates can help you make an informed decision on the timing of your purchase.
