If you’re a millennial, and somewhere between your late 20s and your early 40s, chances are you agree with what you read in the press and what you hear in social gatherings: that the current mortgage rate is an aberration. For most of their adult lives, millennials have only experienced mortgage rates between 2.5% and 5%, which is actually the aberration.
The 30-year mortgage rate averaged 8% between 1971 and 2019, and hovered between 7% and 9% during most of the 1990s. During this time the economy grew 3.4% annually, on average. According to Allysia Finley, writing in the Wall Street Journal, economic growth has generally been stronger during periods of higher mortgage rates.
The general consensus is that higher interest rates will make homes less affordable and could hurt the economy, but not everyone sees it that way. The artificially low interest rates between 2.5% and 5% were just that, artificial. Now we’re returning to normalcy and eventually will bring home values up to normalcy as well.
Remember that 30-year mortgage rates track the 10-year Treasury rate, because many mortgages are paid off or refinanced within about 10 years.
When the economy heats up, Treasury yields rise, as do mortgage rates. The danger here is, rather than allowing the economy to go back to normal, the government housing regulators write standards to help borrowers get mortgages that they may not really be able to afford.
For quite a while, I’ve been writing about how the ultra-low rates may have benefited a lot of homeowners but threw the real estate market into a tailspin.
Nevertheless, sellers who need to sell and give up their low mortgages are lowering asking prices, offering concessions such as closing costs or paying for mortgage buy-downs.
According to Redfin, 21% of sellers nationally dropped their asking price during the four weeks ending Sept. 20. This is leaving the door open for buyers who can tolerate the higher rates and help keep the real estate ball rolling until normalcy returns to the mortgage market.
As I reported last week, Manatee County is experiencing buyer activity in both single-family and condo properties. The average and median sale prices are inching up or holding steady. I think the buyers and sellers are finally getting the message that the fantasy land of 2.5% mortgages is gone forever. If they want a home, it’s now or never.
The next hurdle for real estate is the outcome of Amendment 3 and what, if anything, this elephant in the room does to change the real estate market. Fingers are crossed, and no matter which way the vote goes, the real estate market is sensitive, so there’s sure to be an effect.
