Interest Rates Continue to Frustrate Buyers

How much should buyers really think about interest rates? Shifting rates can make a home that was affordable last month out of reach today. Unfortunately, rates impact the market in ways that go beyond how much a buyer will actually pay for a home over the life of a mortgage. The interest rate can actually determine whether not a home even gets listed. Let’s take a glance at how interest rates are continuing to create one of the trickiest real estate markets in history.

Why Do Interest Rates Matter for Homebuyers?

Interest rates continue to dominate news about the real estate market for a very good reason. With mortgage rates hovering around 7% for a 30-year loan, buyers feel stuck between the rush to buy and fears of becoming overwhelmed by high monthly payments. Rates haven’t been this high since 2001. Buyers who scooped up homes in 2020 were getting an average rate of 3.11%. Today’s sky-high interest rates throttle buying power by increasing monthly payments. In most cases, these higher rates add hundreds of dollars per month to the cost of owning a home. The difference can be hundreds of thousands of dollars over the lifetime of a mortgage.

What Are the Current Interest Rates Doing?

Freddie Mac’s fixed rate for a 30-year mortgage climbed 14 points to hit 7.23% during the last week of August. This uptick was devastating for many buyers who were hoping to find homes before the close of the summer. While buyers who either closed or locked in rates in June and July were able to snap up rates in the range of 6%, buyers who waited until August received an unpleasant surprise. It’s not surprising that August saw a dip in mortgage applications. In fact, reports are showing that mortgage-purchase applications hit their lowest level since October of 2022 during August.

What Interest Rates Mean for Housing Inventory

High mortgage interest rates create a trickle effect that makes it hard for anyone to feel like they are winning. While it may seem like it’s a seller’s market out there right now, the truth is that even many people who want to sell their homes are holding off until interest rates cool. That’s because people selling their homes will be stuck with higher interest rates if they jump to new homes. In markets where owners have accrued generous amounts of equity in response to the nationwide surge in home values, there’s a need to choose between a desire to “cash in” and fear of getting stuck with a high interest rate.

This conundrum is contributing heavily to the inventory crisis that buyers are facing. Many owners are simply choosing to stay put because they don’t want to give up their pre-2022 interest rates. Most people who purchased homes before the Fed hiked rates currently have mortgage interest rates in the range from 2% to 4%.

Why Haven’t Mortgage Rates Gone Down Yet?

Many predictions have been made about where interest rates have been headed for the past year. In fact, many would-be buyers decided to sit out 2022 completely based on industry estimates that rates in 2023 would normalize. That didn’t happen. As a result, buyers going into the 2023 summer season were forced to decide between sitting things out again or simply accepting that elevated rates may here to stay.

As you may already know, the Federal Reserve has been raising interest rates in an attempt to curb inflation. The Fed has signaled recently that it may continue to raise rates until inflation drops to just 2%. Additionally, inflation concerns are pushing up the 10-year Treasury yield that is often used as an indicator for whether or not mortgage rates will remain high.

Do We Know When Mortgage Interest Rates Will Go Down?

Anyone claiming to know exactly where interest rates are going at this point hasn’t been paying attention. According to most experts, it doesn’t look like the Fed will be lowering rates at any point through the rest of the year. Analysts at Vanguard are predicting that the first opportunity for the Fed to cut rates won’t happen until the middle of 2024. While this could give some hope to buyers and sellers getting in position to make moves for next year’s summer buying season, this news does mean that we’re potentially looking at about 10 more months of high rates.

Is There a Way to Avoid Higher Mortgage Rates?

While buyers have a limited amount of control when it comes to avoiding today’s record-making interest rates, that doesn’t mean that they are fully powerless. First, it’s important to remember that you may be able to refinance for a lower interest rate if mortgage rates dip after you purchase your home. Conventional mortgages can generally be financed as soon as you want. If you’re using an FHA loan, the waiting period is usually six months. Buyers do need to know that refinancing comes with closing costs.

Another tip for getting the lowest interest rate possible is to be vigilant about your credit score and finances. Buyers with pristine credit histories and good debt-to-income ratios get preferable loan terms in any market. While there’s not much you can do about the actions coming out of the Federal Reserve, you may be able to get your lender to give you the lowest rate possible by showing up prepared.