How as a home-buyer can you find the perfect home, in the area you are looking at, with the rates on mortgages continuing to go up?
Home-buyer challenges Rates on mortgages and costs grow together with competition
Nate Lowenstein has been shopping for a home in Los Angeles, on and off, for more than a year. His search has been stymied with a stubbornly low roster of homes in the marketplace and the hurdles that are included with it: multiple competing bids and higher prices. “It’s not a great market, from a buyer’s perspective,” said Lowenstein, a lawyer. “The one good thing is that interest rates were quite low.”
As recently since this summer, home-buyers had ultra low mortgage rates on their side. Very good news for any borrower, but especially for those in expensive housing markets like Los Angeles, Boston and Seattle.
But that was then. While mortgage rates remain low by historical standards, they’ve risen sharply during the last few months, pushing the common rate on a 30-year, fixed-rate mortgage to 4.32% the last week in December. That’s was the highest level since April 2014 and well higher than the year’s average of 3.65 percent.
Economists predict mortgage rates will continue to climb this year, just one of the trends that suggest 2017 could be a more challenging year for home-buyers.
“With higher mortgage rates, you’re increasing the cost, challenging the budgets, challenging the ability to qualify and, as a result, likely reducing somewhat the pool of potential buyers,” said Jonathan Smoke, chief economist for Realtor.com.
Thus far, the rate increases have not begun to worry Lowenstein, who is in the market for a house with at least three bedrooms in L.A.’s affluent west side. His budget: Between $1.6 million and $1.8 million.
“We’re not priced out yet,” Lowenstein said. “But if it goes up to 5% or 6 percent, at some point we would be.”
Long-term mortgage rates tend to track the yield on the 10-year U.S. Treasury note. The yield decreases when investors bid up bond prices, as they did following last summer’s vote in Britain to exit the European Union. The move sent long-term mortgage rates tumbling as little as 3.41%.
The opposite happened after Election Day. Investors bet that a Republican-controlled White House and Congress will have a clear path to implement policies that will drive inflation and interest rates higher. A sell-off in U.S. bonds drove the yield on the 10-year Treasury note to the highest level in more than two years. Mortgage rates have been inching higher ever since.
But will they continue to do so? Smoke predicts rates on mortgages will reach 4.5 % in 2017. Other economists expect rates to remain above 4 percent but not go beyond 5 percent next year.
That range would mean low mortgage rates compared with the last decade. Average long-term mortgage rates were above 6 % during the height of the last housing boom, and they hadn’t hit 5 percent before 2008.
So someone looking to buy a home in the next couple of months doesn’t need to panic, said Svenja Gudell, chief economist at Zillow, a real estate information company.
“My advice to buyers would be to not freak out and feel a sense of urgency,” she said. “If you aren’t able to buy a house at 4.5 percent, you probably weren’t able to buy a house at 4 percent.”
The stakes are a bit higher for buyers in expensive markets, where housing can eat up a significantly larger share of household income.
Higher mortgage rates could have one silver lining: As some buyers are priced out, sellers may have to be more flexible on prices. As time passes, that could help stem home prices.
Low inventory and strong demand helped push prices higher in 2016 at the fastest pace in 10 years, in accordance with an analysis by Zillow. The company predicts that U.S. home prices will increase about 3 % in 2017, down from a gain of around 6.Five percent this year.
Declining affordability is one reason the National Association of Realtors predicts that U.S. homes sales will rise 2%. Compare that to the 15 percent surge in sales through the first 11 months of 2016.
Even buyers who can weather higher mortgage rates may need to brace for a long home search.
The inventory of homes for sale is expected to be tighter in 2017 in comparison to 2016. While it varies by market, nationally, less than 1.9 million homes were on the market in November, down 9 percent from a year earlier, according to the NAR.
Home builders are not building enough homes to make up for the shortage, citing a lack of ready-to-build land, labor shortages and rising building materials costs.
Home-buyers also can be prepared to face more competition in 2017 as millennial’s continue to move from renting to home ownership, specifically in less expensive markets in the Midwest and South.
First-time buyers accounted for roughly 32% of home purchases through the first 11 months of 2016, up from 30 percent in the same period a year earlier, according to the NAR.
Affordability remains a hurdle for many first-time buyers, but qualifying for financing may get a little more accessible in 2017.
Fannie Mae and Freddie Mac increased the limit of the mortgages they will buy from lenders this year. Banks could also have an incentive to loosen lending standards if rising mortgage rates continue to dampen demand for refinancing a mortgage.
Advice to every home-buyer
If rates on mortgages keep increasing, there are actually moves that would-be home-buyers could make to better offset a few of the higher borrowing costs.
Consider reducing the interest rate by paying a charge to the lender in the beginning, something referred to as buying down the interest rate. Or go with an adjustable-rate mortgage, which includes a low, fixed-interest rate for a few years, typically five or 10, then adjusts to a higher rate.
Another move: Ask the seller to cover the buyer’s closing costs. That can free up extra money for buyers to manage the larger borrowing costs.
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