Friday, December 2, 2022

Soft Talk From Fed, Leads to Some Easing on Rates

This week saw a little relief in the mortgage lending rates with the Fed softening their stance a little on rate hikes. I have one client that went from 7.125% to 6.625% which greatly improved his purchasing power. Buyers should be optimistic as sellers are now considering closing cost assistance which sometimes allows buyers to buy down their interest rates to make the payment manageable. Even if rates relax a little, buyers may still be able to push the rate down lower buying points to reduce the rate. Sellers can help with this in some situations. 

I would advise buyers find a trusted pro in the lending business who will take the time to explain the pros and cons on buy downs. Every buy down has a cost and there is a specific amount of payments that have to be made before you recapture that cost. For example I have a client that just found a condo they like and are preparing and offer. He wants to soften that payment up to allow for some wiggle room on qualifying for the loan. The rate was 7.125% at the time he could spend an extra $1,700 to buy the rate down to 6.875% which lowers the payment on his particular purchase by $80. This is not an expensive property he is buying. It will take 37 months of payments to recapture that $1700. Since this is a first time home purchase it is highly likely he will remain in the home for more than three years so the buy down makes financial sense. However if the buy down is needed to qualify then it may make sense even if the recapture time is longer. Furthermore, if the seller is helping with closing costs then the recapture almost becomes moot.

I am old enough to remember double digit mortgage rates and when I graduated high school 30 year fixed rates were 17-18% which made those loans nearly impossible. All kinds of specialty adjustable mortgages came to market to try make the entry point lower and they were largely successful. Rates over the last 50 years have averaged about 6-6.5% and where we sit now is about average, maybe just a tick higher. For young people under the age of 35 these rates may seem high since their entire adult lives saw rates lower than they are now. This is the highest they have ever seen, and that is a bit of a price shock for them. Even older buyers have to be reminded that this is really pretty normal rates, we just came off a ten year period where rates were riding the bottom of the historical curve making homes more affordable. That however led to higher demand for homes and thus we saw prices skyrocket. In the end if the Fed gets it right and doesn't overcorrect, we may just see a nice neutral real estate market for a few years. Unfortunately the Fed does have a tendency to overcorrect. Let's hope they get it right this time.

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