Rising Rates: the New Twist in the Housing Market Story

The housing market story has been one of many dominating headlines in the last two years. The recurring theme of low availability and higher home prices have a new plot twist – rising interest rates. The ending to this tale remains to be seen, but one thing is certain: while challenges do exist, it’s still a good time to buy a home.

How we got here.
There’s more than one side to every story, and in the case of this most unusual housing market, two major forces have been in play: availability and affordability. Home inventory has been, and continues to be, extremely low, with a current 30–45-day supply. A six-to seven-month inventory is considered a healthy, balanced market for both buyers and sellers.
Low inventory means there are more prospective buyers than available homes, which leads to higher home prices; on average, homes have appreciated 20 percent in the past year. As soon as a home is listed, there may be multiples offers on the first day. And for every three offers submitted, one of them is likely to be an all-cash offer. Since cash is king to the home sellers, a lower cash offer may beat a higher offer that requires financing, adding another layer of complexity.

Things just got more interesting.
On top of these ongoing concerns, enter rapidly rising mortgage interest rates. In January 30-year mortgage rates were in the mid- to high-three percent range. Today, rates are averaging just over five percent. Higher rates mean higher monthly mortgage payments which can affect what a prospective buyer can afford, but it may not be as worrisome as it seems. A mortgage calculator can help buyers see how a higher rate will affect their budget. And just to put things into perspective, today’s current rates are still low when compared to the near 10 percent average range in the late ‘80s.
An adjustable-rate mortgage (ARM) typically offers a lower initial rate, softening the rising rates blow, although rates and payments can increase over time. According to the Mortgage Bankers Association, the number of adjustable-rate mortgage (ARM) applications has doubled over the last three months. Borrowers should also remember that they can refinance their adjustable-rate mortgage to a fixed rate if rates drop in the future.
The upside of rising rates may be the slowing down of rapid price increases. However, rebuilding available inventory won’t happen overnight so buyers and sellers should expect it to take some time before things return to “normal,” whatever that will look like going forward.

Get ready to you make your move.
Timing the market is hard to do for any investment, and a home may be the biggest investment you’ll ever make. There is no way to know when rates or prices will drop, so prospective homebuyers should not let these issues stand in their way. These tips can help make the buying process easier:
•The first step is finding a trusted lender who will review mortgage loan options and help buyers get pre-qualified, a must in a market where buyers have to be ready to move quickly.
•If possible, get pre-qualified for a conventional mortgage as sellers are often hesitant to accept offers with government-backed financing such as an FHA or VA loan.
•Consider locking in your rate for peace of mind in a rising rate environment.

Buyers who can pay cash in full or make a large down payment may consider a cash-out refi upon loan closing.

While refinancing has become less popular as interest rates rise, it can still be a good option for those who have higher interest rate debt, such as credit card balances, or find themselves strapped for cash post-pandemic.

And for current homeowners who have decided to stay put for now, they can take advantage of the equity to turn it into their updated dream home with no moving required!

Yes, the housing market is challenging, but there’s no time like the present to stop Zillow surfing and make your move.

Visit Canvas Mortgage for a list of other Mortgage Dos and Don’ts.