When mortgage rates soared above 7% at the end of 2022, many potential homebuyers decided that the combination of higher mortgage payments, soaring real estate prices and a low inventory market meant that it was time to take a pause and sit on the sidelines.
- Preparing To Buy A Home
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Mortgage rates are still higher than in 2021, but many buyers realize that they can’t wait forever for rates to go back down. While it’s tempting to time the market, finding the lowest mortgage rates and home prices, the reality is that timing your life is generally more important than trying to find the ideal moment when the market will offer you the best deal.
Any change in mortgage rates will substantially affect your monthly payment. A rough estimate is that for a house priced at $420,000 with a 30-year mortgage at a 5% interest rate, the monthly payment would be approximately $2,254. At a 6% interest rate, the monthly payment would be $2,518. That’s an over 11% difference. Spread that out over a 30-year term and it’s clear why so many people watch every movement in the mortgage market so closely.
Most economists forecast that mortgage rates in 2025 will probably be closer to 6% than 5%. There’s no guarantee that they will return to 5%. The historical average is closer to 7%. The incredible run of mortgage rates under 5% we enjoyed was not the norm, any more than the crazy 18% spikes seen during the early 1980s.
That means, while it’s painful to look back in the rearview mirror and see the mortgage rates we could have gotten, it’s important to move forward and accept that rates may get marginally better but not incredibly so.
Maxwell, a firm that provides technology solutions for mortgage lenders, surveyed 1,000 potential homebuyers to find out what they are most concerned about as they consider buying a home again.
Among those surveyed, 36% hope that mortgage rates will reach 5.5% and see that as the ideal target rate, while another 33% were looking toward a 5% rate. Given what economists are forecasting for rates for 2025, they may be on the sidelines a bit longer if mortgage rates are their primary consideration.
The buyers in Maxwell’s survey have been on the hunt for a long time, with 54% looking for a home for over a year. In a more normal housing market, the home search and buying process can generally be completed over several months.
Frustrated home searchers are finding that not only isn’t there a lot of inventory of homes for sale, but the inventory may not suit their needs at the price point they desire; 47% of the buyers still looking found that the homes in their price range didn’t match their criteria.
Home prices are another reason buyers are hesitant to make a move. Mark Palim, Fannie Mae Senior Vice President and Chief Economist, noted in the most recent Fannie Mae Home Purchase Sentiment Index update that a shift in attitude and high prices rather than mortgage rates are becoming the sticking point. "Consumers are paying attention to the easing interest rate environment but still feel stymied by the considerable run-up in home prices over the last four years.”
Preparing To Buy A Home
Most of the buyers in the Maxwell survey said they were ready to buy if mortgage rates and home prices were favorable. If you are a sidelined homebuyer, how do you know if it’s time to give your goal of homeownership another shot?
A lot depends on your personal finances and long-term plans. Has anything changed since you last decided to buy a home? Is your debt-to-income ratio still the same? Has your timeline changed? Do you have an expiring lease or any other deadline?
If you were already in the prequalification process, your first step might be to contact your lender again and let them know you are ready to try again. Depending on how long it has been since you began looking for a home, your lender may need to re-pull your credit score and you may need to provide new documentation to verify your income.
Once you have updated your lender, it is time to start looking again. This is the time to ensure your wants and needs list is still the same as when you began your house hunt. The good news is that the inventory of homes for sale in many markets has increased. The less good news is that inventory is rising, partly because homes stay on the market longer, not because there is a flood of new listings.
Just because a home has been on the market for a long time doesn’t mean something is wrong. The price could have been too high or it may need more improvements than most buyers are looking to make.
Knowing when to come off the sidelines is tricky. If you wait until mortgage rates drop again, you will likely face more competition for a house and could end up involved in a bidding war that could drive the price of the house you want up higher. Every market is different, but for buyers who may have been waiting on the sidelines, it may be time to take a second look at homeownership.