There is a plausible scenario where mortgage rates continue higher for a short period and then eventually correct. Possibly as soon as next year.
At the moment, 30-year fixed mortgage rates stand at about 7%, thanks to ongoing inflation concerns and action by the Federal Reserve to cool the housing market.
But this battle might be relatively short-lived, with rates returning to more reasonable levels by early or mid-2023.
If and when that happens, the housing market could wake up from its newfound slumber and return to frenzied buying again.
While that’s just a thought, it makes the argument to buy a home before that happens somewhat appealing.
High Mortgage Rates Have Frozen Demand
Now that mortgage rates are well above levels seen earlier this year, demand for residential real estate has cooled significantly.
We’ve already seen appreciation slow, that is, lower year-over-year gains in home prices. And we’re also seeing outright monthly declines now in some markets.
The Fed is taking credit for this housing slowdown, which they believe had grown too hot in recent months/years. It’s hard to disagree.
By raising the fed funds rate from near zero to about 3%, they’ve effectively pumped the brakes on low interest rates for consumers.
That, they argue, should dampen demand, which had been fueling the housing frenzy, not so much a lack of housing supply.
With demand now in check, there is more of an equilibrium in the housing market. The seller’s market has finally come to an end.
And now buyers have the upper hand, despite those not-so-attractive mortgage rates.
What I’m hearing from real estate agents today is that listing agents are actually following up with buyer’s agents.
In the recent past, listing agents often didn’t return phone calls. Or simply asked for final and best offers ASAP.
Now prospective home buyers can take their time, negotiate on price, ask for seller concessions, make repair requests, and best of all, avoid a bidding war.
But again, that darn mortgage rate.
Settle for a High Mortgage Rate You Can Refinance Later?
The argument here is that it might actually be a “good time to buy a home” because the rest of the competition has left the building.
So assuming you still qualify for a mortgage at today’s sky-high interest rates, buying a property could be more palatable these days.
And to reluctantly throw out the cringeworthy marry the house, date the rate adage, you can hopefully refinance your high mortgage rate to a lower one in the near future.
The only real downside to buying now or in the near future is that home prices are still pretty high, and could keep dropping.
That also kind of bolsters the argument though. If home prices come down and mortgage rates drop too, you’ve got the demand problem again.
You’ve got a whole new supply of competition, whether it’s other first-time home buyers, move-up buyers, and so on.
These folks might not be in the game right now, but if and when rates fall, they could be back to outbidding you.
If you do buy a home relatively soon, you can opt for an adjustable-rate mortgage or a fixed-rate mortgage with no points (or as little out-of-pocket as possible).
You can also get those seller concessions, or even rebates from the real estate agent, and use those to lower your borrowing costs and/or the purchase price.
All with the hope of refinancing to a more reasonable, forever rate once interest rates correct.
Yes, there is an argument that mortgage rates fall back to earth after a ridiculous uptrend.
After all, rising from 3% to 7% in less than a year is reason enough for them to see some relief.
Keep Your Eye on the Housing Market and Be Shrewd
What you can do now, if you’re in the market to buy a home, is simply keep an eye on things.
Continue to scour listings, opt-in to listing alerts from your favorite app, whether it’s Zillow or Redfin.
Get a feel for the market temperature. Go to open houses (which exist again) and private showings to see what’s out there.
Determine just how desperate home sellers have become. They too might need time to adjust their expectations with reality.
If and when you do come across a potential winner, something you really, really like, consider an offer. And don’t be afraid to bid below asking.
Think about how the property would fare in a seller’s market. A gem could be worth going for, assuming you buy into mortgage rates being temporarily inflated.
Do the math. If you can refinance your rate back down to say 5% or even lower, what does that look like?
Sure, it’d be nice to get the property for less, but making competition-free offers is pretty nifty too, especially if everyone else is only out because of the higher rates.
Just note that supply continues to be low and the discounts might not be as huge as you expect.
And though it’s clear the seller’s market is over, it’s pretty difficult to call it a buyer’s market.