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Mortgage rates: How did we get here?

Written by Louise Bolger on . Posted in Business, Castles in the Sand, Real estate | Development.

On Sept. 17, when the Feds lowered the benchmark rate, I thought, about time. Although the ¼ point reduction wasn’t enough to bring buyers out of the closet, it was the Feds’ promise of two more rate reductions before the end of the year that for a fleeting moment put a smile on my face, but maybe a bit too soon.

Borrowers who have been waiting for relief from high rates might have to keep waiting. Just to be clear, mortgage rates aren’t set by the Fed, so unfortunately, don’t bet on any major drops soon. For a brief moment in time, the average rate on a standard, 30-year, fixed-rate mortgage drifted down to 6.26%. This was the lowest level in nearly a year, then a week later edged back up to 6.3%. Now we’re hearing that it’s not expected to change much going forward.

The Mortgage Bankers Association recently estimated that mortgage rates would actually increase to 6.5% by the end of the year – what? Why is this happening? While anxious homebuyers are watching the Fed, what they should be watching is the bond market and treasuries in particular.

The big boys on Wall Street are watch­ing the long-term bond yields, which have been drifting lower for several reasons. Among them is the expectation that the Fed will soon start cutting interest rates but also raise the risks of a recession. One big reason that home loan rates have been high in recent years is that banks have been buying fewer mortgage bonds. I don’t know about you, but my head just exploded.

Meanwhile the average homebuyer just wants to get their life moving again. This is what you get when half the country refinances to a 2-3% mortgage – housing gridlock.

There’s an interesting story I read in early September about the danger of having an ultra-low-rate mortgage, so here goes: Once upon a time, there lived a nice young couple with two adorable little girls close to the beach in Florida. Even though their life seemed like a fairy tale, it wasn’t, and they decided to divorce. Sad as this was, their story became sadder still when they realized they couldn’t sell their home and afford to live separately near their children. And this is where it got complicated.

This couple, like many others in the country, took advantage of rock bottom mortgage rates in 2020 at roughly 2%. This was, of course, a good financial plan at the time, however, now that they are divorced, they are experiencing the “lock-in effect.” Basically, homeowners staying in place and not moving because they don’t want to give up their low interest mortgage creates a complicated lifestyle for the couples and the children. This couple has decided to both live on the same property, he in what they call the “beach bungalow” and she in a 19-foot Airstream trailer in their yard. Both have access to both properties, and the children are traded back and forth. And other ex-spouses are also finding a way to keep their mortgage by leaving the kids living in the house with the parents rotating in and out.

With the interest rates still high and the shortage of homes pushing prices up, it looks like couples like these will have this fractured living arrangement for a while. It’s a sad state of affairs when the only reason you talk to your ex-spouse is because you have a 2% mortgage. How on Earth did we get here?

Mortgage interest rate future ‘uncertain’

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Happy New Year, although this year may not be so happy for homeowners and worse for potential homeowners. Both groups are getting hit with increasing costs they never assumed would come. More next week about the growing expense of owning a home.

On Dec. 18, the Federal Reserve enacted a quarter point reduction in interest rates. Sometimes financial markets and mortgage rates react favorably to rate reductions and sometimes they don’t. This time, both the stock market and the mortgage markets didn’t like it. The stock market took a dive, losing more than 1,100 points for the Dow and the mortgage rates for the following two weeks went up.

The reason for this is the Federal Reserve signaled earlier that inflation was under control and they anticipated further rate reductions going forward. Well, we all know that we probably won’t see 3% mortgage interest rates again, but buyers and investors were anticipating at least a little relief on rates. The Federal Reserve backed off their “inflation is under control” narrative and didn’t leave much hope for future rate adjustments.

Mortgage rates for a 30-year fixed rate mortgage went up to about 6.7% from around 6.4% or 6.5%. It doesn’t seem like a lot, but every increase results in lowering the amount of home purchasers can afford.

The projection for 2025 isn’t much better, either, in spite of the fact that in January 2023 some analysts thought rates would be around 4.5% by the end of 2024, obviously a major overstatement. Federal Reserve Chair Jerome Powell says: “Forecasts are highly uncertain, forecasting is very difficult.” This is where my head started to explode.

Nevertheless, the big brains of finance who admit to the difficulty in forecasting are still forecasting for the new year. So, here’s what some of them are saying.

Fannie Mae’s chief economist says, “Long-run interest rates have moved upward over the past couple of months following a string of continued strong economic data and disappointing inflation readings.” They are putting the average 30-year fixed rate at 6.5% in the beginning of 2025, declining to 6.1% in 2026.

The Mortgage Bankers Association (MBA) in its 2025 finance forecast indicates that mortgage rates will gradually slide from 6.6% at the beginning of 2025 to 6.3% through 2026.

The National Association of Home Builders is forecasting 6.12% in 2025 and 5.71% in 2026. The National Association of Realtors (NAR) is predicting 5.9% in 2025 and 6.1% in 2026. And, finally, realtor.com is saying only that in 2025 the range will be between 6.2% and 6.3%. It is interesting that the organizations involved in actually selling homes are more optimistic than the financial institutions.

Getting back to Fannie Mae, they are saying the 30-year fixed rate mortgage rate is now expected to stay elevated between 6% and 6.5% for the next two years. But since “forecasting is difficult,” who really knows?

My advice to potential homeowners who require a mortgage is act now, since you really won’t know what the rates will be going into 2025. If you find a home you like that you can afford, putting it off waiting for a better mortgage rate is a bad decision. You’ll never catch up with the market just waiting for a ½ point decline or even a full point decline. Live your life now, buy your home and get a crystal ball.

Mortgage rate relief?

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Aug. 9 was an interesting day. Manatee County was still cleaning up from the flooding and record-breaking rain from Debby and the mortgage rates hit the lowest level in over a year. What’s the connection? Well, you can’t predict a storm and you can’t predict mortgage rates.

We’ve been waiting for a long time for the day when we see interest rates decrease in any meaningful way. Well, it happened, but will it stick and will it shepherd in more rate cuts?

The average 30-year fixed mortgage rate declined significantly in August since hitting a 2024 high of 7.44% to start May. The average rate on the benchmark 30-year mortgage dropped 26 basis points from 6.73% to 6.47% for the week ending Aug. 8, according to Freddie Mac. This was the sharpest weekly decline in about nine months. A basis point is one one-hundredth of a percentage point.

The key factors here are that home prices nationally fell last year to their lowest level in nearly three decades and 2024 has not been much of an improvement. In addition, mortgage rates have roughly doubled since the Federal Reserve began its campaign to curb inflation in early 2022. This increase in rates has pushed up the monthly cost to borrow for a home, blocking buyers who do not qualify for the additional monthly cost. Finally, the other elephant in the real estate room is the inventory of homes for sale. They have been slowly rising but they remain well below historical averages.

Some mortgage advisors say this is happening faster than expected and predict the central bank will approve one rate cut later this year. This should prompt a gradual easing of mortgage rates, but Freddie Mac still expects mortgage rates to remain above 6.5% through the end of the year and then decrease below 6.5% in 2025.

Fannie Mae predicts the rates will average 6.8% in the third quarter and 6.7% in the fourth quarter. They feel this downward trend will continue into the next year, averaging 6.5% in the first quarter of 2025.

The National Association of Realtors thinks rates will average 6.9% in the third quarter and 6.5% for the fourth quarter, going up to 6.7% by the end of the year. In addition, Chief Economist Lawrence Yun says the second half of 2024 will experience moderately lower mortgage rates, higher home sales and stabilizing home prices.

The Mortgage Bankers Association says rates will average 6.8% in the third quarter, going down to 6.6% in the fourth quarter and continue trending downward next year.

All the above is pretty much in agreement, but one of the most interesting opinions came from Melissa Cohn, regional vice president at William Raveis Mortgage, who was interviewed by a Forbes advisor. She hopes mortgage rates will hover in the 5% range next year, but says the presidential election could factor into it, something I have also heard from local brokers. Fiscal policies could impact inflation, which hopefully can stick at 2%, allowing for reduced interest rates for the next five years.

Nevertheless, she feels that when the rates come down, there will be another hot housing market where there are more buyers than sellers, jacking up prices since the problem of low inventory has not been resolved.

Everyone is still holding their breath for the next several months and waiting to see what the Federal Reserve is signaling for next year. Aug. 9 hit a low and a 6.5% rate may not be 3.5%, but it’s better than 7.5% and may just be enough to get everyone moving. Now on to the next storm.

Lower your mortgage rate – it’s possible

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Last week the big news was the escalation of mortgage rates and the prediction by the mortgage “experts” that we’re not seeing them being lowered anytime soon. This week we’ll touch on ways to maybe achieve a lower rate and help buyers get their foot in the door. There are a few strategies that could help buyers secure a lower mortgage rate now and revisit the loan down the road, but it may not be for everyone.

The first one is a temporary buydown in which a seller, or more frequently a builder, pays an upfront fee to reduce a buyer’s mortgage rate for a specified period of time. It can give a buyer, especially first-time buyers, time to ease into higher payments if they expect their personal incomes will rise in the future or if traditional mortgage rates decline. There are lenders that offer it, but typically builders use it as an incentive for home buyers instead of reducing their price.

There are a variety of temporary buydowns out there with terms that involve number of years and percentage of rate drops. However, all of the temporary buydown arrangements are based on the buyer qualifying for a mortgage based on the current mortgage rate as well as having a high credit score. If you qualify, it’s still worth it, especially in the early years of home ownership, which are always the most expensive.

Another strategy is buying discount points. Essentially what you’re doing is buying the prepaid interest at closing to reduce the size of the mortgage in return for a lower rate. The lower rate is for the life of the mortgage, which can be a substantial savings if you’re planning on living in the home for a long time.

The difficult part of buying discount points and the additional fees that are assessed is that you will require a large down payment. If you have the cash to do this, you need to determine the break-even point, which is the level you save more money than you spend. If this makes financial sense, it could be a good option.

Finally, assumable mortgages can help keep rates down if you can find one. This loan allows a seller to transfer his or her mortgage to a buyer who in turn picks up the remaining loan balance, the repayment period and other terms of the seller’s existing mortgage. All of this sounds great if the seller’s rate is considerably lower than what the buyer can secure at this time. Buyers still need quite a bit of cash to cover the difference between the loan balance and the selling price and they also need to qualify for the loan just like any other mortgage product.

There certainly are a lot of assumable mortgages out there, however, they are generally not conventional mortgages. Most if not all of these loans are government-backed or insured loans by the FHA or VA. It’s also not a simple process for either the buyer or seller and may require some legal advice for the novice.

Getting a lower mortgage interest rate in this financial environment is difficult, but if you have the means, the nerve and a little bit of luck, it could happen. In the meantime, sit tight and see what develops between now and the end of the year. The country is going through many changes and so are the mortgage markets.

Be thankful – maybe

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

This is Thanksgiving week, and in spite of or because of our current housing market, we have much to be thankful for. Not everyone in the world can live in their own home, especially in such a beautiful place. Nevertheless, we need to be vigilant because nothing is ever free.

According to Forbes, as of Nov. 16, the average 30-year home mortgage is 7.83% and the average 15-year home mortgage is 7.06%, down slightly from previous weeks. This may not sound great, but the good news is the rates are going down and are somewhat stable. In addition, the Federal Reserve did not raise rates during its last meeting and has signaled they may be holding steady for a while. The stock market heard this loud and clear and has been improving almost every day.

However, buyers who are actively looking for a new home and a new mortgage still aren’t too happy. To find a way to address the buyer’s reluctance to enter into an 8% mortgage, some lenders are offering programs that include future refinance for free. Of course, lenders are looking to fill the hole left by retreating buyers who cannot bring themselves to sign on for an almost 8% home mortgage and attract new borrowers.

But is this really a good deal for buyers? Nothing in the mortgage industry is free and signing on to what looks like a good deal may bite you down the road. Every lender has its own program with a different set of incentives that can be confusing to even astute buyers.

Usually, lenders will give some borrowers a certificate or another type of IOU that gives them access to a credit that can be used to pay for some of the costs associated with a future refinance. Other lenders may roll the future closing costs into the loan amount or waive lender fees and/or appraisal fees for a future refinance.

The average closing costs for a single-family refinance are approximately $2,500. A lender could offer a credit somewhere between $1,500 and $3,000 for a future refinancing but if the closing costs in the future are less, the difference will not be refunded to you. Also, buy now/refinance later mortgages may have higher initial fees or interest rates or come with time limits.

Since no one knows what the rates will be in the future or what your particular lender will offer down the road, you could be signing up for an unknown. Part of that unknown is whether your credit rating declines or your property value drops and you don’t qualify for a refinance.

It’s always nice to see new ideas that may be available to help buyers, but it might be more beneficial to focus on what you can afford now; don’t assume that the rates will fall in the future and allow you to take advantage of your previous credit.

Refinancing any mortgage is always an option and if interest rates do drop, you’re not tied in to one lender, you can see what the competition is offering at that time. I’m not saying there may not be some great buy now/refinance later programs out there that will be the perfect fit for your finances now, I’m just saying think about the future before you obligate yourself.

Tomorrow be thankful for your family, friends and a bounty of food. Also be thankful for American ingenuity, it makes our country special and offers options for every buyer. Happy Thanksgiving.

Castles in the Sand

A question of affordability

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Buying a house during the past almost three years can be compared to a rollercoaster ride. You go up and you go down, you scream and you hold your breath waiting for the next hairpin turn. But maybe, just maybe, we’re starting to see the end of the ride.

The National Association of Realtors reported at the end of last year that the sales of previously owned homes, most of the real estate market, slid 17.7% in 2022. Also, on a month-to-month basis, sales fell 1.5% in December for an 11th straight monthly decline, the worst rate since November of 2010.

The housing boom generated by the pandemic and the ability for workers to work remotely accelerated selling prices and demand until the Federal Reserve stepped in to cool the economy and curb inflation by raising interest rates. This took a big chunk out of the ability of buyers to proceed with purchases when borrowing rates more than doubled.

As recently as October of last year, mortgage interest rates climbed over 7%, a rate not seen for two decades. This, plus the increased asking price of homes, forced many buyers out of the market since they could not qualify for the additional monthly carrying charges. Now, however, the rates are starting to trend down, and as of Feb. 5, Forbes reported the following average annual percentage rates (APR) rates: 6.37% for a 30-year fixed mortgage and 5.56% for a 15-year fixed mortgage, the two most popular mortgage products.

The forecast for 2023 is that 30-year, fixed-rate mortgage rates will stay within the 5% to 6% range. Freddie Mac forecasts the average 30-year mortgage rate to start at 6.6% in the first quarter and end up at 6.2% in the last quarter of this year and Lawrence Yun, the National Association of Realtor’s chief economist said, “Mortgage rates have fallen for the past few weeks, so I’m very hopeful that the worst in home sales is probably coming to an end.”

The other bit of good news is that the Federal Reserve raised their benchmark interest rate by only a quarter of a percent rather than a full half percent, which they have been doing monthly for some time. All of this may point to the fact that the mortgage rates have hit their peak, advertising to buyers and sellers it may be time to get back in the game.

Next week when we review the January sales statistics, we’ll have a better idea if our local market is starting to show an increase in sales activity and available inventory. As far as affordability, the asking prices on the Island are as high as ever and the construction of new homes is on practically every street. If the city of Anna Maria is second in Florida’s most expensive median listing price, as recently reported by Realtor.com, it will take a lot to turn that around any time soon.

So, just like getting off the rollercoaster, it takes you a few minutes to get your land legs back under you and wait for your heart to return to a normal beat. Everyone’s hoping this is that time… prices are still high but leveling off, mortgage rates are gradually declining and sellers who have been sitting on their super-low mortgage rates may start to reconsider the financial benefit of selling. However, stand by – there’s always another rollercoaster coming down the track.

Castles in the Sand

Higher mortgage rates affect everything

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Think of an octopus – the head of the octopus is the housing market and the tentacles are all of the industries dependent on the housing market. Too much of a stretch? You get the idea.

Anyone who has ever purchased a home goes into it knowing that there will be a lot of out-of-pocket expenses, during the first year at least. New appliances, decorating, paint, furniture, lawn maintenance and a full litany of other homeownership necessities are just a few of the expenses homeowners can expect. Some of these projects are done by the new owners but many are performed by professionals who may see the demand for their services eroding if home sales slow down. Not to mention the effect slower home sales are having on the mortgage industry. Lenders and their employees, many of whom work on commission, are having their own personal recession.

Higher interest rates affect virtually every corner of the economy, but it affects the housing market the most. The higher the rates, the higher homebuyers’ monthly payments are, adding hundreds of dollars every month. This is exactly what our over-inflated economy doesn’t need right now. What it also doesn’t need are homeowners with low mortgage rates making the decision to stay in their homes with their ultra-low mortgage interest rates instead of moving up or out and taking on a loan rate double what they are currently carrying.

The higher the rates go, the less inventory there is or will be on the market. You don’t have to be a Harvard-educated economist to recognize that the supply and demand law is alive and well in the United States housing market. Some economists are calling this the golden handcuffs, tying homeowners to their low mortgages and just sitting on their property even if they want to move. A lot of homeowners are waiting for rates to go down before making their move, but is that really in the foreseeable future? Certainly, some people will still need to move because of personal life events, but those who have the option to not move probably won’t.

Because rates haven’t climbed this rapidly in decades, it’s almost impossible to predict how much the increase in mortgage rates could reduce home listings. Mortgage rates rose for five consecutive weeks in September, reaching the highest level since the financial crisis. Per Lawrence Yun, The National Association of Realtor’s chief economist, “I really don’t see inventory rising.” That’s a really scary open-ended statement. Does he mean the inventory will never improve?

Back to the law of supply and demand, the lack of inventory is one of the major reasons home prices have remained near record highs. Sales are declining, inventory is being suppressed and interest rates going up make for the perfect storm for selling prices to also keep going up.

As far as Florida is concerned, here’s one little tidbit that the Census Bureau reported in 2019, “Florida had the most domestic in movers, with 566,476 people moving from another state within the past year.” That was almost three years ago. I would love to know that number now but, based on the fact that over 321,000 people moved to Florida from the beginning of this year, it will likely be enormous. This could explain why you can’t get a doctor’s appointment lately.

The poor octopus has been called a sea monster but they’re not to blame, especially when the economists don’t really know anything either. The housing market is also a monster in many ways and how the housing market goes, so goes the economy. Buckle up, things aren’t changing anytime soon.

Castles in the Sand

Mortgage interest rates rising again

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Here’s a little perspective on the continuing increase of the 30-year, fixed-rate mortgage. Several months ago, I did an analysis of the average fixed-rate mortgage rates starting in 1971 recorded on Freddie Mac’s website. At the time, something told me that I should hang onto this research, however, I had no idea how much I would be referring to it during the past couple of months.

Since the Federal Reserve decided to increase interest rates in an effort to control inflation, the housing market has been substantially disrupted. Currently, the U.S. mortgage rates have reached their highest level in more than 13 years. The average interest rate for 2008 was 6.3% and we are already seeing rates at or near 6%. In June, the Federal Reserve increased rates by 0.75% points and Fed Chairman Jerome Powell indicates things are not likely to change soon. He hints that at the July meeting there will be another 0.75% increase. Mortgage rates don’t automatically increase when the Fed raises rates, but they are heavily influenced by it.

What we’re seeing happening around the country and in Florida is a decline in the number of sales, not a decline in sale price. Even though there is some increase in the number of new properties hitting the market, it is so marginal it doesn’t even come close to providing enough inventory to satisfy hungry buyers. In Manatee County in May, the supply of single-family homes finally exceeded one month, which is anemic when you consider that a six-month supply of available properties has traditionally been the benchmark for a healthy real estate market.

Complicating the availability versus demand ratio even further is the fact that so many homeowners refinanced their mortgages when rates were under and just over 3%. These homeowners have no incentive to sell any time soon and move on or up to another home. Even potential retirees are rethinking the benefit of selling, helping to freeze the market, not to mention the pandemic providing a new way to do business remotely, allowing employees to work from areas of the country with lower housing prices shifting the market.

Because the interest rates were so low for so long, buyers were able to purchase larger and more expensive homes. However, now with less purchasing power, young buyers are facing the reality of settling for a smaller home with fewer amenities in an area they may not really want to be. Housing costs in the country have jumped from 24% of the average household budget in the early 1970s to 27% in the late 1980s to 35% in 2019 with higher housing costs likely to come based on the increase in sale prices.

Most real estate professionals and economists don’t see prices going down. Goldman Sachs estimates housing prices will grow around 10% this year nationally and Bank of America forecasts 15%. So, it doesn’t look like the Federal Reserve’s plan to lower the heat on the housing market by increasing mortgage rates has worked; there is still a huge demand for properties. It has, however, brought a lot of pain to first time and marginal buyers.

Tony Veldkamp, the president of the Realtor Association of Sarasota and Manatee wisely says, “If the time is right for someone to purchase a home, they should not let interest rates deter them if they can afford the increase in payments. Homes can be permanent, whereas interest rates are temporary.”

I agree. The big picture is that interest rates are still low relative to other times in our history, and that’s my perspective.