Those end-of-2018 mortgage forecasts are probably wrong
NEW YORK – March 25, 2019 – Less than six months ago, mortgage rates marched above 5 percent – the first time in seven years – and for weeks showed no signs of abating.
It was a tipping point for house hunters. Beaten down by rising prices, meager housing choices and bidding wars, they saw rates as one more obstacle and called it quits, causing sales to plummet, even in the hottest of U.S. markets.
"It was somewhat of a surprise to see the degree and intensity of the pullback," said Robert Dietz, chief economist of the National Association of Home Builders. "Five percent at those pricing levels was enough to take the wind out of sails of the housing market."
Enter Federal Reserve Chairman Jerome Powell, who in December promised patience on further interest rate hikes and, on Wednesday, predicted that rates wouldn't budge for the rest of the year.
Mortgage rates are at 4.5 percent and aren't forecast to rise much for this year.
Here's what it means for this year's homebuying market.
More buying power
Buyers won't have to race against the clock as in 2018 when rates started at 4.25 percent in January and were a half-point higher by April, said Mike Fratantoni, chief economist of the Mortgage Bankers Association.
"By the time they found a house, prices and rates had priced them out," he says. "That's very frustrating for buyers."
Lower rates – coupled with rising wages – helps affordability, too. The monthly payment for a $200,000, 30-year fixed mortgage is $71 dollars cheaper at 4.5 percent versus 5 percent. That doesn't sound like much but can make the difference for a buyer on the margins. Total interest savings over the life of the loan is more impressive at $21,699.
"While folks might not have hit the bottom of the rate cycle – no one can perfectly time markets – on the historic side, these are still very attractive rates," said John Pataky, executive vice president, chief consumer and banking executive at TIAA Bank.
Take the gains and run
On the seller's side, there finally is some evidence that more move-up buyers are getting into the market, eventually freeing up inventory of desperately needed lower-priced homes. The average mortgage balance for purchases has reached record levels because of more move-up buyers, according to Fratantoni.
"It's a musical chairs game," he said. "You need someone in the higher end to move, and it works its way down the ladder, eventually opening up an entry-level home."
Inventory in general also has been inching up, largely on the higher end, which also has seen the greatest slowdown in prices.
Perhaps the trifecta of more supply, softening prices and lower rates is enough to persuade some once-stubborn owners to trade up, adding more affordable homes on the market.
Buyers: What you can control
As a buyer, you can't control the Fed or any of the other factors that could affect long-term interest rates. But there are a handful of things you can control that determine the interest rate you get on your mortgage.
Downpayment: The more money you put down, the smaller your rate – with all other factors equal. That's because you're taking on more risk as a buyer and lessening the risk for your lender. On a monthly basis, you can eliminate the private mortgage insurance portion if you can get a 20 percent downpayment.
Credit rating: Lenders give the most favorable rates to people with higher credit scores who demonstrate a positive track record of repaying debts. On a $216,000, 30-year, fixed-rate mortgage, you'll get a sub-4 mortgage rate if you have the highest tier of credit scores – 760-850 – versus a 4.5-percent rate if your score is 660 to 679, according to FICO.
Debt-to-income: Lenders also look at the percentage of your debt payments to your total monthly income. The higher the percentage, the riskier the loan. If you can, pay off the debt with the highest monthly payment to lower your DTI.