Virginia Tech expert offers advice for homebuyers in midst of volatile housing market
Mortgage rates are higher than they have been since 2008, and a Virginia Tech expert says consumers shouldn’t expect rates to go down anytime soon.
“The Federal Reserve recently made clear their commitment to manage inflation and that future rate increases should be expected,” said Jonathan Everett, an assistant professor of practice for the university’s Blackwood Program in Real Estate. “Like many things in real estate, it ultimately comes down to supply and demand. Is there reasonable demand despite interest rate increases?
“I would venture to guess interest rates will continue to rise in the short run, anything short of a market catastrophe, but I do suspect we are reaching a resistance level where affordability is becoming an issue at today’s sales prices – something will need to give. I will be curious to see if new mortgage products will be a byproduct of this predicament. For example, I can imagine a world where homeowners can stretch out their payments over 35 or even 40 years.”
Everett offers the following advice for homebuyers to consider given the current state of the real estate market.
How significant are recent mortgage rate changes?
Very significant. According to the Mortgage Bankers Association, we have not seen the 30-year mortgage rate at this level since November 2008. Delving deeper, the average weekly rate for the 30-year mortgage thus far for 2022 is approximately 52 percent higher than the average weekly rate for 2021. To put that in perspective, the next two highest comparable increases were in 1980 and 1981 when the average weekly rate for 1980 was nearly 23 percent higher than the average in 1979 and the average weekly rate for 1981 was approximately 21 percent higher than the average in 1980.
If 2022 interest rates continue their current trajectory, the relative pace at which rates are increasing could be one for the history books. Even though we are coming out of record low interest rates, and rates are still within the range of historical norms, I think what has been so eye catching is the sustained velocity in which interest rates have changed over the past several months.
Do you have advice for homebuyers navigating this market?
I would encourage homebuyers to keep a level head when determining how much to pay and exercise proper financial discipline, despite a hot real estate market. In terms of mortgage products, I personally prefer a 30-year mortgage as opposed to a 20- or 15-year mortgage. I would much rather be in a position to pay the mortgage off early then be in a cash flow pinch, need the money, and not have it. This is especially true in a high inflationary environment. I can have thousands of dollars in equity in my home, but the bank still expects my next payment to be made in full and on time. As the old saying goes, cash is king! The downside to a longer-term mortgage is paying more interest over the life of the loan, all else equal. Additionally, debt is a double-edged sword that needs to be handled in the context of personal and financial circumstances.
When determining affordability, homebuyers need to anticipate an increase in their monthly mortgage payment to cover the inevitable increase in real estate taxes owed due to rising home values or potential changes in real estate tax rates.
If homebuyers are determining affordability based on current circumstances, I would argue they could find themselves in an uncomfortable or jeopardizing financial situation down the road when values are reassessed.
How are mortgage rates effecting sales prices and affordability?
In one sense, home values are holding strong and both the median sales price for existing and new homes have increased so far this year. As of May 2022, the median sales price of existing homes was $407,600, a 15 percent price increase from January 2022. As of May 2022, the median sales price for new houses sold in the United States was $449,000, representing over a 4 percent increase from January 2022 prices. However, when you look at the housing affordability index produced by the National Association of Realtors, in January 2022, the index was 143.1 and has since declined to 109.2 as of April 2022. Ultimately, a lower index value is not a good thing and when the value drops below 100, then a family earning a median income will not qualify for a mortgage on a median-priced home. So arguably, affordability could be an issue in the not-so-distant future. One could argue this has the potential to slow sales or put downward pressure on sales prices going forward.