If you are a prospective homebuyer, things have changed in the past year. Most notably, mortgage rates have more than doubled which has created an affordability gap that has taken approximately 15 million buyers out of the market.
Inventories are growing but it isn’t because more people are deciding to sell their homes; it is because it is taking longer to sell properties because less people are qualified. Current housing inventory is a little more than a quarter of what it was in 2008.
Buyers are wondering when the market will return to normal, as if mortgage rates at three and four percent should be commonplace. The average mortgage rate between April 1971 and November 2022 is 7.76%.
Predictions for mortgage rates in the third quarter 2023 range from 4.5% for Fannie Mae, 5.0% for Mortgage Bankers Association, and 5.2% for Freddie Mac.
Traditionally, over the past 35 years, there is a 175-200 basis point difference between the 10-year Treasury and the 30-year mortgage rates. However, recently, the spread has been 300 basis points. Some experts explain this to indicate that the Fed’s tactics for lowering inflation is working and the mortgage market will soon respond which is indicated by lower rates in the past few weeks.
"The gap between the 30-year fixed mortgage rate and the government borrowing rate is much higher today than it has been historically," NAR Chief Economist Lawrence Yun, said. "If we didn’t have this large gap, mortgage rates wouldn’t be 7%, they would be 5.8%."
There is opportunity for prospective buyers in today’s market. The slowing of housing sales, down 34% from December 2021, have changed the environment buyers were experiencing in 2020 and 2021. Instead of having to pay a premium over the list price, many sellers are willing to negotiate on price.
Without multiple offers being the normal, buyers can expect to include contingencies for financing, appraisal, inspections, and possibly, the sale of a home currently under contract.
Some buyers who are confident that mortgage rates will come down soon have opted to purchase now with an adjustable-rate mortgage. This can lower the rate by about one percent for the first period which can be five years. When mortgage rates returned to acceptable, the borrower could refinance to a fixed-rate mortgage.
Another option to consider would be to do a buydown on the mortgage rate. Assuming that in the "softer" market, the seller would accept an offer to buydown the interest rate for the first two years. It would allow the buyer to purchase at today’s prices, with much lower payments for the first two years.
Example
| $500,000 Purchase Price, 80% loan-to-value @6.13% for 30 years | Cost of buydown – $8,934 | |||
| 1st year | 2nd year | Remainder | |
| Payment Rate | 4.13% | 5.13% | 6.13% |
| P&I Payments | $1,940 | $2,179 | $2,432 |
| Monthly Savings | $492 | $253 | |
This type of mortgage is a standard, conforming, fixed-rate loan where the buyer must qualify at the note rate. The payment for the first year is 2% less than the note rate and for the second year is 1% less than the note rate. The difference must be paid in advance at closing and in the case of this example, the seller paid it based on contract negotiations.
During this period of lower payments, if the rate comes down, they could refinance the property. Let’s further assume that the rates come down at the end of the first year. If the property is refinanced before the pre-paid interest is owed, the lender is required to reimburse the borrower which could be applied toward the cost of refinancing.
When the mortgage rates do return to an acceptable rate, there may be considerable pent-up demand from the mortgage-ready buyers who were priced out of the market. This could lead to another seller’s market where high competition results in prices above list price and sellers not willing to accept contingencies.
Temporary rate buydowns have been available for decades. Their main purpose is to help a borrower get into a home with lower payments initially. In some cases, they need it because they depleted their cash reserves on the down payment; in other situations, maybe, they are upwardly mobile and expect to be making more income soon.
The reason lenders across the country are talking about them now is because they provide a reasonable and viable alternative to buying a home at today’s prices without having the higher payment initially for the current rates. It especially makes sense if you believe that rates are coming down soon.
Your real estate agent can give you more information about this and explain how you can negotiate with the seller to pay the fee to get this type of loan. Call us at (727) 631-4191.