We now have an entire generation, born since the middle ‘80’s, that believes they are entitled to mortgage rates just above free. Ironically, they were actually born when mortgage rates ran as high as 18%! During the Carter administration, if you had a 7% mortgage, you were not only lucky, you were considered to be a financial genius. That would now be considered highway robbery. They were stunned when the federal rates went up a quarter percent recently.
They will likely wait around for rates to go back down. They also waited around for all the cheap houses to disappear before starting to look for a new home, because they figured they would probably get one for less money eventually by doing nothing.
On the other hand, people wanting to sell their homes are wringing their hands over the same increase, assuming there will be no buyers because of the “skyrocketing” mortgage rates.
In my past life I was a commercial lender. My clients were typically pretty sophisticated about financial issues and markets. One thing I could depend on is that if borrowing rates were standing still, people never ran out of time to make a decision on buying something. However, if the rates started moving, business usually improved, no matter if it was up or down. If rates went down, they might be tempted to go ahead and buy those new trucks instead of continuing to maintain the old fleet. If rates started to tick up, they got more serious about replacing those old front end loaders before the cost debt service got any worse. Most of them didn’t wait around unless they had no need at all. But most of them followed the money markets and knew their jobs.
No one really knows for sure what will happen over the next year, including the people who will make the decisions, but we will likely see more increases. For those who don’t remember, they lowered rates, and now they can raise rates. That’s just part of the cycle.
However, this is not all bad news for the time being. With modest increases, mortgages will continue to be very reasonable for those who stop waiting. An increase of .25 percent at current rate levels on a $170,000 thirty year mortgage would only amount to about a $25 per month increase.
The bigger worry is when you wait around for a trend to reverse itself. Once it starts moving, it tends to keep moving in the same direction for a while. The last time the rate was increased was ten years ago. People are born and die and get married and start families in that time span. Are you willing to wait that long to buy or sell a home?
For buyers, have a plan. You will need some form of down payment, usually at least three percent. Do you have a plan for gathering that money? Are you spending five dollars a day for a double foam-chocolate-fudge-mocha-latte on the way to work? That’s $1100 you could be putting toward a down payment. If you’re spending ten bucks for lunch every day, that’s another $2200 you could be saving. That is about all you need for to get into an entry level home these days.
As prices go up, and mortgage rates increase over the coming months, that simple goal moves farther out of reach.
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