Story by Aarthi Swaminathan
Homeowner Marie Cantu, 35, lives just outside of Seattle, and has been looking to buy a single-family home outside of Boston to be closer to her family.
The mom-of-five has been “seriously looking” for three-bedroom homes for the last six months. Cantu is hoping to rent her home in Washington, and move roughly before the school year starts, so that her children can adjust better to the new neighborhood. Cantu, a stay-at-home mother, homeschools her children.
Higher rates make housing more expensive — and less affordable — for aspiring homeowners. They have also been a major factor in keeping would-be home sellers out of the housing market.
On Wednesday, the U.S. Federal Reserve raised the benchmark rate by 25 basis points in line with most Wall Street economists’ expectations, making it the 11th rate hike among the last 12 Fed meetings. The benchmark rate has now reached a 22-year high of 5.25%-5.5%.
Cantu is fortunate in that she isn’t in a position where she has to sell her home. Her home, which she bought for $700,000, is fully paid off.
She is looking to buy with cash and a partial mortgage at the prevailing mortgage rate. She said that her “ideal” rate would be 3% to 4% but acknowledges that those rates were historic lows seen during the pandemic. But Cantu said she has accepted higher rates as the new normal, given that the 30-year mortgage interest rate is now hovering just over 7%, more than double what it was two years ago.
But the house search recently hit a major speed bump. Cantu told MarketWatch that she put an offer in a couple of weeks ago on a home — the only time she got close to buying a home she really wanted — she was outbid. “It was listed at $699,000,” Cantu said, and she offered $715,000. “And someone outbid us,” she said.
Cantu’s brush with the hot post-pandemic housing market — where inventory has been so low that home buyers are once again competing with each other to buy homes — reveals how mortgage rates have pushed the U.S. housing sector into a fundamental supply-and-demand problem.
Demand continues to remain steady as home buyers adjust to the new normal of higher rates. But housing inventory is at a record low, with under a million single-family homes listed for sale on the market.
The lack of homes is due to the fact that the vast majority of homeowners currently have a 30-year mortgage — well below today’s rate of 7%. They have little reason to sell, as doing so may require them to purchase another home with a much higher mortgage rate.
The 30-year was averaging at 7.04% as of Wednesday morning, according to Mortgage News Daily. Mortgage purchase applications, which gives insight into how many people bought a home with a mortgage, fell 2.5%, according to the Mortgage Bankers Association.
According to the Atlanta Fed, high rates and home prices across the nation have pushed the cost of homeownership up sharply since the same period last year. For a family earning a median annual income of around $76,000, purchasing a median-priced home of $357,000, they would have to spend 41% of their income on housing, the Fed calculated.
Experts advise home buyers to forget what they saw during the pandemic when it came to rates. “I don’t think people should expect mortgage rates to go back to the 3% range,” Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch. “We have short-term memories when it comes to where rates were before COVID.”
For those who are keen to sell their home or buy three years after a pandemic pushed rates to record-low levels, they should temper their expectations. “We’re not going to see mortgage rates back down to 3% ever in our lifetimes — it’s simply not in the cards,” Lisa Sturtevant, chief economist at Bright MLS, told MarketWatch. “Unless something catastrophic happened again.”
The good news: rates are expected to fall over the next few years, just not to the most recent low of 2.71% in December 2020. In its July housing forecast, Fannie Mae said it expects the 30-year to go below 6% at the end of 2024. While many homeowners and homebuyers may feel discouraged by that forecast, experts said people will likely acclimatize to a higher interest-rate environment, as people’s circumstances change and selling becomes more imperative.
What’s a ‘normal’ mortgage rate for home buyers?
Just how low do rates need to go to push people to get back to the property market?
Americans will have to adjust their expectations, Cohn said. “A buyer will say to you that the rate has to be 3% — but that’s not the reality,” she added. “We have to take the rate during the pandemic out of the equation in order to go back to a healthy real-estate market.”
A healthy real-estate market would look much like the U.S. housing market between 2015 and 2019, she added, when rates were between 3% and 5%. “That was at a point when rates were low enough that people were like, ‘It’s a good deal. I can afford this,’” Cohn explained.
A more realistic range for the 30-year fixed rate that could be helpful for home buyers would be between 4.75% to 5.25%, Matthew Ricci, a Rhode Island-based home-loan specialist at Churchill Mortgage, told MarketWatch. Within this range, “you will start to see an increase in inventory,” he added.
Recent research suggests that the 30-year falling to a “magic” rate of 5.5% would be enough to push more home buyers to purchase homes, according to John Burns Real Estate Consulting in April.
The company surveyed over 1,300 homeowners and renters and found that 71% of prospective buyers who plan to buy their next home with a mortgage said they are not willing to accept a rate of over 5.5%. In fact, 62% said that they believe a “historically normal mortgage rate” is less than 5.5%.
What mortgage rate will encourage homeowners to sell — and buy again?
On the flip side, what will it take for homeowners — who are not going to buy another house with all-cash — to sell their homes and for the number of new listings to increase?
Sturtevant said that a fixed rate below 6.5% for the 30-year could tempt homeowners to start selling, particularly if they are leveraging the significant rise in house prices over the last three years and using equity in their home to reduce the size of their next mortgage.
Many homeowners who sell may be able to tap the proceeds from the sale of their current home to pay for a new one. A first-time buyer, on the other hand, will have to borrow a six-figure mortgage at 7%.
So as rates approach 6%, “I think we’re going to start to see new listing activity begin to increase here in the second half of the year,” she added.
Sturtevant noted that homes — like Cantu’s home in the Seattle metro area — have appreciated considerably in value over the last few years. Homeowners can, therefore, use that equity if they choose to sell.
What’s more, finances and interest rates are just part of the equation. “Nobody’s going to be thrilled about trading in their super low mortgage rate for something above 6%, but their home buying and selling is about more than just finances,” Sturtevant said.
“There are a lot of families and individuals out there living in homes right now that just aren’t right for their families,” she added. Empty nesters, for example, are more likely to be focused on retirement, and may want to downsize to a smaller property with a small mortgage or, indeed, no mortgage at all. In that case, selling up might make sense.
Others, like Cantu, are renting their current home and buying another, Cohn said. Some “have very low rates, so they can make a very good margin on rental income,” she added.
Ricci said the majority of his clients are either first-time home buyers, people relocating for work, or landlords who are cashing out. “Most people aren’t going to sell unless they have a need to sell,” he said. “Or they’re in a situation where they have multiple properties.”
Cantu, the homeowner from Washington, bought her current home with her husband — who passed away in 2021 — for $700,000. She said that real-estate brokerages estimate that her house is now worth close to $1.2 million. But she still isn’t keen on selling.
“I don’t want to just cash out to a developer for $1.2 million. I would love to just rent my house for a reasonable price to a family who needs it,” Cantu said. What kind of tenant would she like to get? “Someone who is just priced out of here because it’s gone crazy the last four years,” she said.
But being outbid on her first offer forced Cantu to reckon with the tough housing market. “It was a little crushing because I realized I’m probably going to have to get a place that needs some work,” she said.
“It was discouraging,” Cantu said, ‘but I’m going to keep looking.”
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