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There are times in economic history when supply and demand are not the only factors ruling transactions. War, weather and politics can all interrupt the simple formulas on which we rely. After the worst of the COVID-19 pandemic, many owners reentered the real estate market to see if the favorable pre-pandemic conditions would deliver profits on home sales. Still, despite low inventories and a surplus of buyers, sellers find themselves settling for less than they expected. Why? After a long stretch of low mortgage rates, banks are making financing more expensive.
Before and After
While the U.S. Federal Reserve System ("the Fed") policies do not immediately affect mortgage interest rates, banks and other lenders pay close attention to changes in rates set by the Fed. Eventually, some Fed directives are felt in the mortgage market. Prior to the full onslaught of the Coronavirus, for example, the Fed's benchmark overnight rate was hovering between 1.5 percent and 1.75 percent. As the pandemic picked up steam, the Fed responded to a slew of layoffs, and closings by priming the pump, IE. dropping the benchmark rate to nearly zero on order to stimulate the economy.
Nearly two years, and two vaccines plus a booster later, the mortgage lenders took a cue from the Fed, which in January of 2022 announced pandemic-related rate decreases would soon be reversed. Making good as spring approached, the Fed booted the key rate up from .25 percent to .50 percent. Usually a lagging responder, the mortgage banks and finance companies quickly lifted their 30-year fixed interest rates to an average of 3.75 percent, a rate not seen since the pandemic began.
Higher Rates and Lower Prices
For long-time homeowners, those who bought 40 or 50 years ago, a 3.75 rate would be something to jump at. After all, the average home financing rate for a 30-year fixed loan topped 16 percent in 1982. Yet the scope of the increase can affect the monthly payment significantly. As a consequence, buyers want to borrow less, hence pay less for a house or property. For example, a $350,000 house receiving a $70,000 down payment and financing for $280,000 will demand $1,257 in principal and interest per month. Upping the rate to 3.75 gives a payment of $1,296. This nearly $40 extra per month is modest for some but too much for others. The pool of eligible buyers is now smaller.
Will Higher Rates Be Cost-Prohibitive?
Those looking to buy in this new environment may ask themselves whether now is the right time to purchase a home. Finding the right product and servicer can help home seekers save on fees and other expenses that offset some of the hardship of higher rates. Power Play Mortgage can help.
www.powerplaymortgage.com
Craig Daniger - Loan Officer
Phone: 818-326-1915
Email:
