Home Buyers: How to Navigate A Market with Higher Mortgage Rates - Frederick Real Estate Online (2024)

Mortgage Interest Rates Are On the Rise

…

Due to the FED’s policy of increasing the federal funds rate (the benchmark for most interest rates) in an attempt to minimize inflation, we have seen mortgage rates rise an average of 2% since last year.

With inflation at 40-year highs and the Federal Reserve making aggressive rate hikes to combat it, mortgage rates seem likely to remain at their current levels in the near future. Some lenders are telling us they think rates will be lower by the end of 2023…but, just like REALTORS, they don’t have a crystal ball!

Remember that the FED does not set mortgage rates, but these rates often follow the same general trend as the overall market.

Most experts believe if inflation continues to increase, interest rates will continue to rise, and if they can curb inflation, rates can either stay level or possibly decrease.

The truth is that rates move unpredictably most of the time. It is difficult to time the market or predict what will happen with rates. Home buyers are typically better off buying when they’re financially ready regardless of the rate market.

What Higher Rates Mean to Home Buyers

Higher mortgage rates increase the amount of interest that a borrower pays on the amount that they borrow. Naturally, higher interest rates mean higher monthly payments, and buyers can buy less than they could when interest rates are lower.

If home values continue to rise because of supply and demand, which we expect to happen, home buyers can look forward to a further limit on what they can buy.

We love the saying: Date the Rate, Mary the House. You can always refinance, but you can’t get increasing equity from a home that you didn’t buy while you were waiting for the rates to come down.

What is Currently Happening in the Real Estate Market

Low Inventory

Besides higher mortgage rates, inventory plays a huge role in the real estate market. We have seen historically low inventory in central Maryland (as well as in most of the U.S.) for a couple of years…since before the Pandemic, but certainly a severely low inventory since early 2020.

We have been seeing a slight increase in inventory since the end of the pandemic, but we have certainly sales decrease. As sales decrease, the inventory is getting the chance to catch up. We have been expecting a more balanced market, which has its positives, but we still don’t have the inventory we need for the demand.

Healthy, Albeit Lower Demand

Throughout the Pandemic, we experienced a robust demand for homes. The number of homes sold increased month after month, throughout 2020 and 2021, and at the beginning of 2022.

Understand, demand is still higher than what we consider a “normal” market here in Central Maryland, but it is slowing down from the frenzied pace we’ve experienced these last two years. We have begun to call them “the Unicorn Years”…historically low rates, robust demand, and historically low inventory.

See Current Frederick County Market Statistics

Rising Home Values

With the combination of high demand and lower inventory, we have seen rising home values over the last few years. Year-over-year from 2020 to 2021 we saw a 19% increase in home values.

The S&P CoreLogic Case-Shiller 20-city home price index in the US increased 21.2% year-over-year in April of 2022. Keep in mind, that this is a national average. Remember, Real Estate is Local. Even though news headlines often refer to national statistics, it is more important to be aware of what is going on in your local market. It’s always best to consult a local Realtor®.

We saw a slightly lower percentage during 2022 of 6% to 8% in Frederick County. As the increases lesson, we can tell we’re headed for a more “normal” market…with 3% to 5% increases in values year-over-year.

Back to the Top

What Can We Expect with These Market Conditions?

Normally, rising rates lead to falling prices…but this market is not normal. With the shortage of inventory, we still have an imbalance of supply and demand. Although not at the frenetic pace of last year, we are still seeing values rise.

Of course, we don’t have a crystal ball, so we can only make estimates. Much of what we will see in the market still depends on supply and demand. Several circ*mstances can affect demand…including if there is a recession how deep a recession may be, and how high interest rates will climb to combat inflation. Keeping an eye on several economic indicators is wise.

What is the difference between a seller’s market and a buyer’s market? When and how does the shift occur? A seller’s market is what we’ve been experiencing for the last 2 years, low inventory and high demand. A buyer’s market is the opposite, low demand and high inventory.

There are several signs that indicate a shift from a seller’s market to a buyer’s market, and we aren’t seeing many of them yet. Although it makes good headlines, we are not ready to say that a buyer’s market is on the near horizon.

One thing is clear, the market is shifting from a deep seller’s market to a more balanced market. As inventory increases, buyers will find a more favorable market, as far as inventory goes, for the first time in several years.

How Buyers Can Navigate the Real Estate Market with Higher Rates

Before we panic over rising interest rates, let’s take a look at rates historically. Freddie Mac has been tracking mortgage rates since 1971. The average rate since that time is 7.77%. Mortgage rates peaked in 1981 at 18.4%. Even though 3% rates are a recent memory (just months ago) historically speaking…

today’s near-6% rates have not even reached the average of 7.77%. History gives perspective.

As rates rise and demand modulates, we are expecting a more balanced market. This is a good thing. With a more balanced market, buyers have a little bit more time to make decisions. They can also not be so worried about writing contingencies in their offer. The frenzy relaxes a little and most people appreciate that.

Eight Tips to Navigate A Higher Mortgage Rate Market

1. Understand Credit Scoring. It is still important to build and keep a good credit score. The higher your score, the better interest rates you can expect. That fact never changes, no matter what’s going on in the market.
2. Get Preapproved. No matter what’s going on in the market, pre-approval is a must. It helps buyers know how much they can afford and gives them an edge when they make an offer. Having that pre-approval is like having a head start in front of the competition.
3. Budget Wisely. Buyers should be very clear on the difference between what they can qualify to borrow, and what they can comfortably afford to borrow. Take all things into consideration before you start looking…retirement plans, tuition for children, savings goals, emergency funds, and future payments for a car or for home maintenance. Don’t let the emotions give your common sense the boot.
4. Consider an ARM. An adjustable-rate mortgage offers a low initial rate over the first period of years and then adjusts after that. A 5/1 ARM has an initial lower rate for 5 years, and then it adjusts to the current rate. ARMs can increase the amount a buyer can borrow. Yes, there is some risk involved because no one knows what the rates will be at the time of the adjustment. Generally, if you plan to sell within 5 years, an ARM can be a good choice. Be sure to speak to your trusted lender to see if an adjustable-rate mortgage is right for you.
5. Consider a Higher Down Payment…if possible. Most mortgages, including FHA loans, require at least 3% or 3.5% down. VA loans and USDA loans are available with a 0% down payment. But if you can put 10%, 15%, or even 20% down, you might qualify for a conventional loan with low or no private mortgage insurance.
6. Ask Your Lender about Discount Points. Remember those? We haven’t seen them in a few years because who needs them with 3% mortgage rates? A discount point costs 1% of the home loan amount and can lower interest rates by approximately 0.25%. If you plan to stay in your home for more than five years, it may be worth the up-front cost.
7. Lock in Your Rate. The FED has stated that rates will most likely rise in the future. Ask your lender to lock in on the current rate to avoid paying more.
8. Be Circ*mspect. The best thing about a balanced market is that buyers have a little more time and breathing room. As we see the inventory rise, that means there will be more choices. If you’re not seeing a home that suits your needs, you can wait for more homes to come on the market.
9. Look for home buyer assistance programs in your state, county, and city. Our state has a valuable program for first-time buyers called the Maryland Mortgage Program. The program offers down-payment assistance and lower-than-average interest rates. There are several programs, including a loan that pays off student debt for qualifying borrowers.

Perspective

Remember, if you can get a 30-year mortgage rate at or below 6%, you’re paying less than most American homebuyers throughout history. That’s not a bad deal.

Back to the Top

Find Out What My Home is Worth (in 15 seconds!)

Search for Homes in Central Maryland

Need A Real Estate Agent in Your City? We Can Refer a Great Agent!

Call or text: 301-401-5119, or

Pin for Later Reading: https://www.pinterest.com/pin/4292562136738167

Related