Mortgage rates rise above the 7% barrier | Mortgages and advice

Mortgage rates rose above the 7% threshold for the term of 30-year fixed mortgages this week, according to Freddie Mac. This is the first time that average rates have entered 7% territory since the beginning of 2002. Interest rates also increased for the 15-year fixed term and the 5/1 adjustable rate mortgage. Here are the current mortgage interest rates, as of October 27:

  • Fixed 30 years: 7.08% with 0.8 point (compared to 6.94% a week ago, compared to 3.14% a year ago).
  • 15 years fixed: 6.36% with 1.4 points (compared to 6.23% a week ago, compared to 2.37% a year ago).
  • 5/1 year reviewable: 5.96% with 0.3 points (compared to 5.71% a week ago, compared to 2.56% a year ago).

Erika Giovanni

“The 30-year fixed-rate mortgage topped 7% for the first time since April 2002, leading to further stagnation in the housing market. As inflation persists, consumers are seeing higher costs at every turn, driving consumer confidence further down this month. . In fact, many potential buyers are choosing to wait and see where the housing market ends up, pushing demand and house prices even lower.”

– Sam Khater, chief economist at Freddie Mac, in an Oct. 27 statement

As mentioned in last week’s column, mortgage rates of 7% could become the “new normal” as the Federal Reserve struggles to rein in historically high levels of inflation. Rising interest rates have had a tangible impact on homebuilder confidence as well as consumer sentiment, and it’s understandable that many of us are suffering from data overload.

Amid such turmoil in the housing market, even the most seasoned analysts are grappling with an explanation. So in a recent Q&A, economists at real estate brokerage Redfin tried to clear up confusion about the housing market. Below are some of the most relevant advice they gave to potential buyers and sellers.

Indicator of the week: Words of wisdom from housing economists

Why Home Prices Haven’t Fallen and When They Might Fall

Although higher mortgage rates have long been expected to trigger a deceleration in house prices, house prices have remained stubbornly high in recent months. There are two reasons for this, according to Taylor Marr, deputy chief economist at Redfin.

“One is that supply has fallen along with demand, and the other is that home sale price data is a few months behind what’s happening in the real-time market. “, explains Marr.

As demand from home buyers has fallen, the inventory of homes for sale has also fallen. Indeed, many homeowners who benefit from advantageous mortgage rates of 3% will probably not sell their house and will exchange it for the interest rates of 7% offered today. But house prices are expected to fall eventually – it’s just a matter of waiting for housing data to catch up with current market conditions.

“Over the next six to 12 months, prices are expected to fall year-on-year, possibly double digits in some areas,” adds Marr. “They will still be higher than pre-pandemic levels, but many homeowners will be upset that their home values ​​have fallen.”

Who should consider buying a home in today’s market?

As a general rule, it always makes more sense to buy if you plan to live in the same home for the long term, even in turbulent short-term market conditions. Real estate has its ups and downs like any other asset class, but home values ​​tend to appreciate over the course of 10 years or more, Marr says.

“If someone is going to sit in a house for 10 years, the house is unlikely to lose value,” Marr says. “The 7% mortgage rates are a hard pill for many people to swallow. But there is a silver lining to high rates: competition is low and buyers have the opportunity to bargain with sellers.”

Redfin Chief Economist Daryl Fairweather adds that cash buyers could still consider buying now as mortgage rate volatility won’t impact their monthly payments. These buyers are able to take advantage of slower buying activity and may be able to negotiate with sellers on home price, closing costs or other contingencies.

But for the vast majority of buyers who need to finance their home with a mortgage, Fairweather’s advice is to consider markets where prices aren’t as sensitive to national trends.

“Home values ​​are unlikely to drop significantly in a place like Chicago or upstate New York, so buying in those places is less risky right now,” Fairweather says. “Home values ​​are likely to decline the most in pandemic boom towns like Phoenix, Boise and Austin; potential buyers in these areas should be more cautious entering the market at this time.”

Tips for those choosing a variable rate mortgage

Rising fixed interest rates have led many buyers to consider a variable rate mortgage instead. Data from the Mortgage Bankers Association shows that about 13% of mortgage applicants choose ARMs, which is the highest demand for ARMs since 2008. Although it may bring back bad memories for those who remember borrowing ARM during the Great Recession, economists say this mortgage product is very different today.

“Think about your long-term plans. If you plan to stay in a home for five years or less, MRAs are a good option,” says Marr. “‘Adjustable’ is in the name, but it’s fixed for a few years. But if you’re buying a house forever, ARMs are riskier because the rate — and your monthly payment — could go up in five years.”

ARMs may also be an option for those planning to refinance their mortgage before the fixed rate period expires, Fairweather adds. “Historically, most home buyers have been able to refinance at a lower rate within five years, given the decades-long downward interest rate trend.”

But Marr reminds potential ARM borrowers of an important caveat: “Refinancing is expensive. It typically costs between 2% and 5% of your loan value, which can amount to tens of thousands of dollars.”

Before choosing a variable rate over a fixed rate, review your options with your lender and determine if refinancing will be worth the interest savings in the long run.

What today’s potential buyers (and sellers) should know

Many buyers who are spooked by today’s high mortgage rates – and the uncertain implications the rates have on future home values ​​– are choosing to put off buying a home. This is not possible for all buyers, however. Some Americans are forced to relocate due to job change, divorce, or other life circumstances.

“For people buying a home right now, make sure you don’t stretch your budget,” Fairweather says. “Mortgage rates are high and inflation is driving up the prices of most other things too. Make sure you have a savings reserve to cover emergencies and that every dollar doesn’t go to your down payment and your monthly mortgage payments.”

Home sellers should also consider the limits that higher mortgage rates have on buyers’ budgets. There may be ways for sellers to help buyers achieve an affordable housing payment without having to significantly reduce the price of the home.

“If you need to sell now, be open to negotiation, contact the buyer’s agent, and work with the buyer to get their ideal monthly mortgage payment,” says Marr. “There may be concessions that will make the home you’re selling – and the price you want – attractive to both parties. For example, sellers may consider paying closing costs and/or helping the buyer reduce the mortgage rate.”

Additionally, Marr adds that demand could return sooner than expected if buyers “get used to higher rates.” If rates fall to 5% over the next few months, this could encourage some buyers to return to the market. For sellers who are ready to cash in, it may be beneficial to wait a little longer before listing their home.

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