To wait or not to wait for mortgage rates to drop

LOS ANGELES (AP) — Buy ​​a home now or wait for the possibility of lower mortgage rates? This question arises for many homebuyers this spring homebuying season.

Lower rates give homebuyers more financial flexibility, so waiting for a more attractive rate can make a big difference, especially for first-time homebuyers, who often struggle to find an affordable home .

However, there is a potential downside to waiting. Lower rates can attract more potential buyers, heat up the market and drive up prices.

Acting now would likely charge the buyer a rate of around 6.9% on a 30-year mortgage. In late October, the rate climbed to nearly 8%, its highest level in 23 years, according to mortgage buyer Freddie Mac. Economists generally expect the average rate on a 30-year mortgage to fall later this year.

“If mortgage rates do indeed fall as expected, I would expect there to be more competition from increased demand, so that’s one reason to act now,” said Danielle Hale, chief economist at Realtor.com. “And then those buyers, if mortgage rates go down, would probably have the opportunity to refinance.”

Gagan Hegde, a software engineer in Durham, North Carolina, leans toward a proactive approach as he looks to buy his first home.

Hegde, 29, fears that delaying his search could end up pitting him against others who are also seeking lower rates in an already highly competitive market.

Just recently, he matched the list price of $450,000 for a townhouse, but another buyer offered more than the seller was asking.

Rather than dwelling too much on mortgage rates, he’s now focused on finding a three-bedroom, three-bathroom home he can afford. Once rates fall, he will look to refinance.

“I’m completely agnostic about financing prices, because I think if you start paying too much attention to it, there’s no clear answer,” he said.

The rock-bottom mortgage rates that fueled a buying frenzy in 2021 and early 2022 are long gone. Although the average 30-year home loan rate of just under 7% isn’t far from the historical average, that’s little consolation for homebuyers who, before the last two years, hadn’t seen such high average rates since the beginning. almost two decades.

Combined with a nearly 44% increase in the national median sales price of previously occupied homes between 2019 and 2023, high mortgage rates have made buying a home less affordable for many Americans.

A recent analysis from Redfin found that a typical American household earns about $30,000 less than the $113,520 per year they need to afford a median-priced home in the United States, which the company estimated at $412,778 in February. Redfin defines a home as affordable if buyers spend no more than 30% of their income on their monthly housing payment. The analysis takes into account a 15% down payment and the average rate on a 30-year loan in February, which was about 6.8%.

Lower mortgage rates would increase the purchasing power of home buyers. Financing a $400,000 home with a 30-year mortgage with a fixed rate of 6.82% on average last week works out to about $215 more per month than if the rate were 6%, for example. Two years ago, when the mortgage rate averaged 4.72%, monthly payments on the same loan would be $534 lower.

Many economists expect mortgage rates to fall this year, but not before inflation has cooled enough that the Federal Reserve can begin lowering its short-term interest rate.

The Fed has said it plans to cut rates this year as soon as it sees further signs that inflation is slowing from its current level above 3%. How the bond market reacts to the Fed’s interest rate policy, along with other factors, can influence mortgage rates. Current indications are that mortgage rates will remain high for some time to come.

For now, uncertainty about where mortgage rates will move is working in favor of homebuyers like Shelby Rogozhnikov and her husband, Anton.

The couple owns a city home in Dallas and wants more space now that they’re planning to have their first child. They are looking for a home with at least three bedrooms that is priced within their budget of around $300,000.

They feel no urgency, but they want to avoid increased competition if mortgage rates fall in the coming months.

“I know interest rates will eventually go down, but I have a feeling that when they go down, real estate prices might go up again,” said Shelby Rogozhnikov, 38, a dental hygienist. “I have to worry about the mortgage rate and my body clock, which has less time than the mortgage rates, so it’s now or never.”

Real estate agents from Los Angeles to New York say bidding wars continue, but not as often as in recent years in some areas.

“Overall, the bidding wars are not as extreme as they have been in markets’ past,” said Tony Spratt, an agent with Dallas-area Century 21 Real Estate Judge Fite Co. -Fort Worth. “We’re still in a seller’s market, but it’s a lot softer than it was.”

Home buyers also have more property choices this spring than a year ago. Active listings — a count that encompasses all homes on the market but excludes those awaiting a finalized sale — have exceeded year-ago levels for five straight months, according to Realtor.com. They jumped almost 24% in March from a year earlier, although they were down almost 38% from March 2019.

The still relatively tight inventory helps give sellers an advantage in many, but not all, markets across the country.

In Raleigh, North Carolina, home listings are taking longer to sell, which has made sellers more flexible on pricing or covering repair costs, said Jordan Hammond, a Redfin agent.

“Before, we saw that sellers could really do whatever they wanted,” she said. “They had no contribution to make to the buyer’s purchase. And now it’s kind of reversed. I see more and more buyers pushing sellers.

Still, the low inventory of properties on the market means that home buyers who can find a property for sale in their price range may want to make an offer rather than wait, as there is no guarantee that a better option will show up immediately.

Those shopping in areas where new home construction is more prevalent may have better luck this spring.

In response to rising mortgage rates, more than a third of builders reduced home prices in 2023. Many also offered buyers incentives such as mortgage rate buydowns and below-market rate financing.

Builders have also ramped up construction of smaller, less expensive homes, part of the reason why the median sales price of a new home in the U.S. fell nearly 8% in February from the year before. previous, to reach 400,500 dollars. This is the lowest level since June 2021.

Home buyers and sellers waiting until summer to test the market will also need to consider how they might be affected by proposed policy changes regarding real estate agent commissions.

Last month, the National Association of Realtors agreed to make policy changes to settle federal lawsuits that claimed the trade association and several of the nation’s largest real estate brokerage firms engaged in practices sales that forced homeowners to pay artificially inflated commissions when they sold their homes. .

The policy changes, expected to take effect in July, could result in home sellers paying lower commissions for their agents’ services. Buyers, in turn, may face higher upfront costs when hiring an agent.