RATES UP – WHAT SHOULD HOME BUYERS DO?
(this is a bit long but we think it will help with your decision to “buy now or wait”
The Federal Reserve’s (FED) interest rate increase of another .75 basis points is notification that the FED is determined to subdue inflation. Although the FED’s decision only affects short-term rates (those for credit card, auto, home equity lines of credit and short-term commercial loans) any increase usually also affects our long-term home mortgage rates.
The confusion mounts as we hear words like stagflation or recession. Suffice it for now for us to suggest that we are still a long way from entering any of these economic stages. In the meantime, what should a prospective home buyer do. It may sound like so much real estate hype but our suggestion is that if one finds the right home, at the right price and a qualified loan, make the purchase. While we are not economic experts, here are some reasons why we make this “go forward” recommendation.
Home Values Not Declining; Traditional expectation is that as interest rates increase, home values decline. Although home values have moderated appreciation remains substantial. Maye it is because the demand from buyers exceeds the supply of available homes for sale? Should we eventually see some downward value adjustment, history informs us that waiting for such reduction vs rate increases is not an economic winning strategy. You can explore this possibility as well as the financial calculations of this trade off with your lender.
Interim Financing: As rates climb, buyers might benefit from examining alternative financing options. The 30 year mortgage was the right choice for most buyers when interest rates were at their half century historic lows but an Adjustable Rate Mortgage (ARM) might be the better loan option at this moment? We are not necessarily promoting this program but it is worth considering the following possible benefits depending upon your circumstances and future plans.
- The ARM rate will likely be lower than the 30 year rate and can be fixed for 5 or 7 years.
- If plans call for moving within the 5 to 7 years, the lower rate makes good sense and allows for a greater equity build. You will liquidate the property before any ARM rate adjustment.
- If you intend to remain in your home for a longer period, think of the ARM rate as an interim loan and factor in the idea that you may have to consider a future refinance. The risk is that insufficient equity exists or that rates do not decline when you need to refinance? Our best guess, however, is that rates will eventually retract to the more normal 4.5 – 4.75% level.
Emotion Control: Disappointment over having missed the low, low rates can interfere
with a more dispassionate evaluation? Past bidding wars or rejected offers may have caused you to stop searching? These are the very reasons why buyer competition could reduce. If home values were to additionally moderate, the house hunting climate could be significantly improved for those willing to recalculate their risk of accepting higher interest rates?
Avoid Analysis-Paralysis: This market requires careful decision making. It is easy to become paralyzed when weighing all the possibilities. You must assess your personal economic comfort level. Do the math. Don’t be bullied into any transaction without clear thinking and assessment of the pros and cons. At the same time, don’t miss out on purchasing that right home simply because of reluctance to make the decision. Finally, trust your intuition. Your lender can help with the facts and figures but the decision has to be yours.
You might face an affordability situation in which you no longer qualify for the necessary home financing. If so, stay positive. Determine what you can qualify for and initiate the path to home ownership so that you are ready when the market readjusts – because it will. Call us to pre-qualify.