Home mortgage rates are down but you’d better hurry

Small changes in mortgage rates can have a big impact on the housing market.

North Texas home sales fell about 6 percent in the fourth quarter of 2018 in large part due to higher home finance costs. The drop in home buys in the final months of the year caused sales for all of 2018 to drop for the first time in almost eight years.

Higher mortgage rates — which rose to about 5 percent in early November — were the biggest contributor to the slump in Dallas-Fort Worth home purchases last year.

Now that mortgage costs have eased off a bit, builders and real estate agents say they’re seeing more home shoppers hit the market.

They’d better hurry. Home finance costs are traditionally the lowest at the start of the year.

And the Federal Reserve has signaled that more interest rate hikes are coming in 2019.

“It provides a little bit of urgency in a market where buyers have gotten lackadaisical about mortgage rates — they just assumed they would stay low,” said Paige Shipp of housing analyst Metrostudy Inc.

Potential buyers were caught off guard last year when they found they couldn’t afford as much house as they wanted and their monthly mortgage payments would be higher than expected.

“The buyers that said interest rates are too high and we can’t do this are probably regretting that they didn’t get approved for a loan and keep hunting houses,” Paige said. “Rates are lower now.

“If people want to buy a home in the spring, they need to stay on top of where mortgage rates are.”

The decrease in nationwide average mortgage rates to just under 4.5 percent has already caused a surge in applications for home loans.

“We have seen a boost in loan application volume, both for purchase and for refinance,” said Frank Nothaft, chief economist for CoreLogic. “Fixed-rate mortgage rates are down about a half percentage point from November 2018.

“That is an important gain in affordability,” he said. “For example, to buy a $300,000 home with 20 percent down payment, the monthly principal and interest payment for a $240,000 30-year fixed-rate loan has dropped from $1,280 to $1,209, a monthly savings of $71. That makes a big difference in a family’s budget.”

Nothaft still expects home loan costs to move higher this year — back to near 5 percent at the end of 2019. And rates are still almost a half percentage point higher than they were a year ago.

“With interest rates expected to rise, if the prospective home buyer is ready to buy, it’s better to act sooner than later,” he said.

Lawrence Yun, the National Association of Realtor’s chief economist, said the dip in home finance costs should bring another 200,000 nationwide home sales this year. “Falling mortgage rates have always boosted sales,” Yun said. “Sentiment and enthusiasm has turned for the better.”

The National Association of Home Builders has even boosted its outlook for U.S. home starts this year because of the lower finance rates.

“Our forecast calls for a slight improvement in sales due to rates falling from 5 percent to 4.5 percent,” said the builders’ association’s top economist Robert Dietz.

If you are planning to buy a house, don’t dawdle. Contact the Indigo Skye Group and let us go over your options on what you can afford or how to best price your home to sell.

No one expects the recent reduction in home mortgage rates to last forever.

Home mortgage rates are changing mortgage chart indigo skye group blog
Home finance costs have dropped since a recent peak of almost 5 percent in November. (Source: Freddie Mac)

Dispelling the Myth About Home Affordability

We have all seen the headlines on home affordability and that report that buying a home is less affordable today than it was at any other time in the last ten years, and those headlines are accurate. But, have you ever wondered why the headlines don’t say the last 25 years, the last 20 years, or even the last 11 years?

The reason is that homes were less affordable 25, 20, or even 11 years ago than they are today.

Obviously, buying a home is more expensive now than during the ten years immediately following one of the worst housing crashes in American history.

Over the past decade, the market was flooded with distressed properties (foreclosures and short sales) that were selling at 10-50% discounts. There were so many distressed properties that the prices of non-distressed properties in the same neighborhoods were lowered and mortgage rates were kept low to help the economy.

Low Prices + Low Mortgage Rates = HOME Affordability

Prices have since recovered and mortgage rates have increased as the economy has gained strength. This has and will continue to impact housing affordability moving forward.

However, let’s give affordability some historical context. The National Association of Realtors (NAR) issues their Affordability Index each month. According to NAR:

“The Monthly Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent monthly price and income data.”

NAR’s current index stands at 138.8. The index had been higher each of the last ten years, peaking at 197 in 2012 (the higher the index the more affordable houses are).

But, the average index between 1990 and 2007 was just 123 and there were no years with an index above 133. That means that homes are more affordable today than at any time during the eighteen years between 1990 and 2007.

Bottom Line

With home prices continuing to appreciate and mortgage rates increasing, home affordability will likely continue to slide. However, this does not mean that buying a house is not an attainable goal in most markets as it is less expensive today than during the eighteen-year stretch immediately preceding the housing bubble and crash.


Related article: How does supply of homes impact buyer demand?