I won’t venture to guess where residential mortgage rates will be in 6, 9, or 12 months or beyond. Nor will I pretend to fully understand the tangled spiderweb of datapoints that factor into when or why mortgage rates change.
What I will do, though, is offer a different perspective on today’s interest rate environment: that of a real estate professional who’s deep in the trenches, and not that of an economic analyst or mortgage lender speaking monetary gobbledygook.
For any buyer or seller wrestling with how to approach today’s interesting rate climate, read on.
It wasn’t until 2009 (keeping in mind that mortgage data has been tracked since the early 1970s) that a 30-year fixed-rate residential mortgage dipped below 5%. As most remember, we were in the midst of a worldwide financial meltdown, and in order to keep money flowing into the economy (I’m oversimplifying here, but you’ll get the gist), the federal government lowered bowering rates to incentivize folks like you and me to buy things, including real estate.
Similarly, in 2020, when the COVID-19 pandemic shuttered businesses and prompted shelter-in-place mandates, the government again stepped in to prevent an economic apocolypse, resulting in 30-year fixed-rate mortgages that plunged as low as 2.68% (something that was unimaginable to those of us who had worked in the industry for any period of time). This, in combination with businesses allowing permanent remote work – which unshackled employees from having to commute or live near their physical offices – whipped up an explosion in the market of atomic proportions. Buyers poured into the market in droves, folks relocated to other areas in unprecedented numbers, and nearly every existing homeowner with a mortgage refinanced into record-low rates.
As many remember, being a buyer in 2020 or 2021 was – let’s say – unpleasant, to put it nicely. It wasn’t uncommon to be in competition with dozens (yes, dozens) of other buyers, having to pay 15-20% (or more) over the asking price just to have your offer looked at, waiving your ability to inspect the property you were purchasing, and offering to pay a cash difference between what a bank was willing to lend you and what you were willing to pay (meaning, not only were you getting a loan for a house, but additionally writing a massive check to close the sale); that is, assuming a seller would even consider looking at a financed offer at all, given the high number of cash offers being written. It was a chaotic free-for-all.
Now that rates have climbed, manyfind themselves in a dilemma: if you’re a buyer, do you wait until rates fall before pulling the trigger? If you’re a seller, do you relinquish your beloved 3% interest rate and purchase a new home at a rate that’s more than double?
Let’s look to the lessons of 2020 and 2021 for the answers. Today’s buyer (or today’s seller, who may be considering buying something else), in many cases, has more purchasing options than at any point in the past 4 years. They can generally shop without fear of being entangled in a 20-buyer-pileup, they can perform their due diligence and have a home professionally inspected before purchasing, and they can elect to have the protections of an independent bank appraisal to ensure they don’t overpay for their dream home. And yes, they may have a mildly painful mortgage payment for 12 or 24 or 36 months, but that mortgage can quickly and easily be refinanced into a lower rate when interest rates ease, which they inevitably will.
Alternatively, buyers can stay huddled on the sidelines (along with everyone else) until rates soften. But isn’t it possible – highly probable, even – that when rates deflate, a mini 2020-2021 will ensue all over again, with everyone piling into the market at once, causing home prices to skyrocket and creating an agonizing rerun of Bidding Wars 2.0? Many think so, including me.
So, here’s the real question: does it make sounder financial sense to purchase, for example, a $400,000 house today, at a 7-8% interest rate, having a better selection of properties to choose from, with the ability to inspect, the protections of a mortgage contingency, and the ability to refinance into a much lower payment down the line – or, is it wiser to purchase that same home in [insert number of months here] for $450,000 or even $475,000, at a 5-5.5% interest rate, being in competition with a gazillion other buyers, having to waive all protections of due diligence, and potentially losing out on a dozen houses before finally getting an offer accepted on a property you may not even like very much?
This seems like a no-brainer to me. Those who gobbled up real estate in 2009-2010 when everyone was afraid of their own shadows made out like bandits in the long run. And I suspect the same, albeit for different reasons and under different circumstances, will be said about the 2023-2024 market several years from now.