What do rising mortgage rates mean for the 2019 real estate market? Well around Atlanta, we’re already getting a feel for that. Expect the real estate market to find balance; rising rates will impact buyer actions and force sellers to realistically price homes. The frenzied approach of buyers should largely disappear; replaced with measured decisions.
Influences on mortgage rates come from many directions. When money moves over into stocks from fixed rate assets, like mortgage backed securities (MBS), the yield on mortgage backed securities (MBS) drops. This forces rates to go higher to provide yields that investors demand to purchase them. The Fed anticipates another bump at the end of 2018 and is projected to raise rates 1.25% (five .25% hikes) before leveling out in 2020. The current economy is humming…the Fed’s concern is inflation so they will work to cool/control the pace. Mortgage experts expect 5% to be the average rate for conventional buyers come spring of 2019. That range will vary based upon individual credit worthiness and mortgage options.
What rising mortgage rates mean to home buyers
1. First time home buyers and those budget conscious buyers need to pay particular attention to how a rate bump will impact the ability to buy. A .25% can be the difference between qualifying or not. A rate bump can also impact the ability to save for a down payment. Mortgage insurance can also rise with rates and ratios. Rising rates will eliminate some buyers, those edge buyers need to be completely tuned into the trends.
2. Home buyers should always strive to secure the best possible price on a home. However, an eye should be kept on rates. There may come a point where it’s better to “give” on price than end up with a higher mortgage rate. What’s the move if everything on a home works but we can’t get it down to the “right” price? Is it better to wait out the seller and hope rates remain level? Or is it better to beat up the seller, feel comfortable and secure a potentially better rate?
What rising mortgage rates mean to home sellers
1. Sellers have enjoyed the upper hand in most markets for the last two years; rising rates will level the field. This will be especially true in the first time buyer market. A healthy market is a food chain; if the first level slows, the impact will be felt further up the chain. This is especially true in the first and second move up level; these homes need to attract attention and stand out. Higher end homes are less likely to feel a direct impact as buyers tend to be more financially mature and stable.
2. The idea that home prices have been and will continue to increase should be dismissed. So should the idea that sellers just need to “name their price”. Sellers had a nice run, now it’s time to understand the data, the trends and the impact that a likely reduced number of buyers will have. While there will always be hot micro markets, the idea of “name your price” is likely over.
What rising mortgage rates mean to the overall real estate market
Kept in context, an average mortgage rate of 5% or even 6% is far from alarming. Over the past 45 years, interest rates on the 30-year fixed-rate mortgage have ranged from as high as 18.63% in 1981 to as low as 3.31% in 2012. The challenge is more mental; rates have averaged under 5% since 2010 and many current first time buyers were learning about the Pythagorean Theorem and how to construct a Thesis statement at that time. Historically, rates are still very very good.
It’s reasonable to expect a slowdown as rates increase. Again, many variables impact a market but fewer buyers (esp first time buyers) means fewer sales. We already saw the impact of limited inventory – and how many sellers enjoyed multiple offers during the spring ’18 market. Many buyers overpaid for homes; getting caught up in the competition and stress of limited inventory. Many were also concerned about rising rates as the Fed became more active; a “now or never” feeling set in. Buyers now tend to be more circumspect; while multiple offer situations are still seen in some micro markets that trend has slowed overall.
There’s no reason to expect a crash over the next year or two, there is reason to expect an adjustment. The price increases in many areas were often unexplainable and unsupported by the data. The amount of new construction, reduced in quality and increased in price has resulted in excess inventory in areas. For months, emails offing incentives and broker bonuses have been sent daily. Many flips and “infill” new builds are sitting as are homes with aspirational prices homes. Toss in rising rates, fewer and more cautious buyers and something has to give.
The mantra doesn’t change; this is a business transaction. Pay attention to the data and use that as a basis for decisions. Pay attention to the CURRENT market. Listen to buyers – when traffic on a listing is crazy good and there are no offers…why? If new listings are getting hammered in the first days, as a buyer should you jump in or wait two weeks? If a deal is hanging by 1% or 2% is it worth getting done to preserve a lower mortgage rate? Go to the mat over an inspection issue or get it done? Both buyers and sellers will be faced with questions like these.
Last and familiar point – please please work with experts. Qualify your agent, demand excellence! A quick Google or Zillow search is a great way, having a nudnik agent that is either incompetent or indifferent can kill a transaction. This agent must deal with other agents, appraisers, inspectors and all others involved in a deal; experience matters.