The 30-year fixed-rate mortgage averaged 6.53% as of May 28, up from 6.51% the week prior, and down from 6.86% at this time last year. With continued uncertainty around inflation, the war in Iran and tariffs, what does this mean for the real estate market?
If you are in the market to buy but understandably feeling some trepidation about buying now, there can be advantages to buying in this window vs. trying to time the market. Below is a discussion of the dynamics between interest rate changes and home prices and how it can impact your payment.
If you are considering selling, success is very possible with accurate pricing and marketing, and understanding the sweeteners that could help buyers get across the finish line can be helpful, which I talk about further below. Read on for tips on how to navigate today's market from both a buyer and seller perspective.
With a new Fed Chair confirmed and installed, all eyes are now on which way will the Fed go on setting benchmark interest rates. The next Fed meeting is on June 16-17, at which time the Fed should make a determination about what it will do. Inflation for April was 3.8%, largely driven by energy prices. Notably housing was below overall inflation at 3.3%, with details below. So what does this mean for you?
Consider a $1,000,000 home with 20% down, which is an $800,000 loan. At today's rate of 6.53%, the monthly principal and interest payment is approximately $5,060.
The economics change if and when rates drop in the future; to run some numbers, let's assume a modest rate drop to 6.25%. Rate drops typically bring buyer demand up, putting upward pressure on prices, particularly in supply-constrained markets like Los Angeles. If that same $1,000,000 home appreciates $50,000 as a result, the loan grows to $840,000. At 6.25%, the monthly P&I payment is approximately $5,170, or roughly $110 more per month than buying today at the higher rate. A higher price usually comes with a higher property tax bill as well. Your specific mileage will vary, and a lender can give you more detailed figures.
To be clear, there is no guarantee demand and prices will increase when rates drop. However, historically we've seen buyer demand pick up after a rate drop.
In sum, the risk to waiting for rates to drop is a buyer could see higher competition if and when rates do drop, pressuring pricing up. If a buyer purchases now and rates do drop later, that buyer can refinance their mortgage to the new, lower interest rate.
When interest rates are higher, the buyer pool can shrink at a particular price point, but a well-priced home can still attract a strong cohort of buyers. This means it is essential to have the most accurate market data to list with a price that will bring foot traffic in the door. The truism in real estate of 'The risk of slightly overpricing is greater than a risk of slightly underpricing' is more relevant than ever.
Additionally, if needed, one way to help alleviate buyer concerns with interest rates is to offer to buy down a buyer's interest rate. A $10,000 seller concession applied as a rate buydown will generally deliver more monthly payment relief to a buyer than a $10,000 price reduction. For sellers reluctant to reduce asking price, this is often the more efficient path to closing and it preserves your recorded sale price.
What about if you are also in the market to buy? The same logic applies from the buyer perspective note above. You can also take steps to backstop potential financial exposure, such as selling with a contingency to buy, which means that if you enter into a contract to sell, the deal won't finalize until you have closed escrow on your next purchase.
To recap, even in an uncertain time, you can still have a successful sale with the right pricing and potentially modest incentives to a buyer. Reach out to me to discuss your own situation, or get your estimated home value through my interactive online tool.
As always, please do not hesitate to reach out with any questions you may have.
Best regards,
Jonathan