By Ron Lieber
Feb. 22, 2022
It’s what you think you want most in the world. It costs more than nearly anything else you’ll ever buy. The price may have risen over $50,000 last year. And now, here you are, trying to figure out what the machinations of the Federal Reserve might mean for you and your home purchase.
That’s hard, and I’m sorry. If it’s any consolation, professional prognosticators don’t know what’s going to happen next, either.
“We know every forecast will be wrong,” said Douglas G. Duncan, senior vice president and chief economist for Fannie Mae.
One thing seems certain: The Fed is planning to raise the rates that banks charge each other for short-term loans. That will increase borrowing costs for all kinds of loans — although mortgages aren’t as directly connected to those increases as others.
The Fed’s goal is to tamp down overall inflation, but the weird circumstances caused by the pandemic mean the housing market might not obey.
That means you’ll have to be flexible. So start with the knowable.
There were double-digit percentage price increases last year on what is now, at the median, a $408,000 collection of new gypsum and sticks. (It’s $350,000 for existing homes.) Mortgage rates have already risen more than a percentage point off their record lows. And sales have jumped to start the year as many buyers tried to lock in a more attractive rate than what might be available in just a few months.
Now take some deep breaths. You have questions about what this means. These answers should help.
Q: The Fed sure seems like it’s going to raise rates next month. What’s going to happen to mortgages?
A: Mortgage interest rates will probably rise before the year is over, from their current level of 3.92%. But it’s not just Fed rate increases in play here. There is an unusual action that may come from the central bank that could drive an increase.
The federal government owns enormous bundles of home mortgages that live inside bonds, which it bought in recent years to stabilize the housing market and the overall economy.
The housing market is more than fine now, and the Fed wants out of those bonds sooner rather than later. If it sells too many too fast, however, it could flood the market and force bond prices down.
At that point, bankers trying to package and sell new bundles of mortgages would need those new bonds to pay more to investors so they’ll buy them. And in order for those bonds to pay more, homeowners will need to be paying higher interest rates on their mortgages.
That is one likely scenario where mortgage rates would rise further this year.
Q: OK, so mortgage rates may rise some more. Won’t prices fall at that point? (Please?)
A: Well, prices stopped growing as quickly as they had been when rates rose for a bit in 2018. Does that help? That could happen this time, too.
But … it might not. When you ask people about what they plan to pay if mortgage rates rise, as Andreas Fuster and Basit Zafar did for a paper they published early last year, the responses seemed surprising. The researchers asked what the prospective buyers would be willing to pay if mortgage rates were 6.5% instead of 4.5%.
The respondents’ price target was only 5% lower, on average. Nearly half didn’t change their figure at all.
That’s a sign there could still be a lot of competition among buyers, even with higher mortgage rates. Then again, that survey took place before consumers were so antsy about inflation driving up the costs of day-to-day living.
Q: So you’re saying this time is different?
A: Yes — and no. The facts always change, even if economic, stock and housing market cycles are regular (if not predictable or consistently timed) events over our lifetime.
And oh, what a set of facts we have. A pandemic and the government response resulted in many people spending less on travel, commuting, clothes, student loan payments and entertainment.
That put extra money in the down payment accounts of those who didn’t lose their jobs or any income. At the same time, the mortgage bundles the Fed was buying helped lead to record-low mortgage rates.
That made it easier to bid up house prices — just as lots of people sped up moving plans in search of more space to work at home and keep kids out of their hair. There was even more competition for available homes, and new homes took longer to build because of supply chain issues and labor shortages.
There’s more. Professional investors were buying homes — with the all-cash bids that most sellers prefer and most individual owners can’t match — as never before in 2021. According to Redfin, they accounted for 18.4% of the home purchases in the fourth quarter of 2021. In southern and western cities — like Atlanta, Charlotte, Miami, Orlando, Las Vegas and Phoenix — investors accounted for more than a quarter of sales.
These institutional buyers are probably not done, either.
“It’s an absolutely terrible time to be a buyer,” said Sarah Ponder, a financial planner in Austin, Texas.
There, the median home price has risen 30% in the past year, according to the city’s Board of Realtors.
Ponder, who specializes in helping real estate professionals and has already done five property transactions of her own in just 15 years of adulthood, pointed to one final X-factor: Folks her age may not know what rapidly rising interest rates do to one’s homebuying psyche.
“I’m part of an entire generation of people that are accustomed to low rates,” she said. “If and when it normalizes to longer-term averages, then people my age will be relatively unhappy.”
Q: Is there any reason for me to rush to figure all of this out?
A: No, even if there has been a spike in purchases lately.
Ponder isn’t necessarily advising people to sit this market out, although she would prefer that people not stretch themselves financially. Financial planners — and lenders — generally want people to spend no more than 35% or so of their income on total housing costs. Most people should resist the temptation to push those boundaries; Ponder generally wants her clients well below them.
And remember: Mortgage math in a higher interest rate environment may not be truly horrible as long as a bank will still give you a loan.
A 30-year fixed-rate mortgage of $300,000 has a $1,432 monthly payment if the interest rate is at 4%, near its current levels. At 6% — which, to be clear, would be the highest rate in more than 13 years — the payment would be $1,799. An extra $367 a month is hardly pocket change, but it’s a sum that many people may still be able to squeeze out of a budget.
Still nervous? It’s worth remembering that playing along is not a requirement. Being a renter is not a disqualifier for life satisfaction. And in some circumstances, buying a home in an environment like this is a recipe for regret.
“The most important thing is to make sure that you’re willing to stay at least five years,” said Daryl Fairweather, Redfin’s chief economist. “Whatever happens in the market, you should gain enough equity where when you sell, you’ll come out ahead, even after paying fees.”
So maybe this isn’t a beware moment just yet. But it’s certainly a be wary one.
“What I worry about is people starting to act irrational when trying to compete for a home that they don’t actually like,” Fairweather said. “The worst case is that you buy it and end up selling it in a year. If the market’s down, you could be in a really precarious position.”
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