The Market Is Shifting. Here's Why That's a Good Thing.
On May 4, the Fed raised target federal funds rates a full half-point, the largest such bump up in rates in more than 20 years. The objective is to slow inflation while being mindful not to slow the economy into a recession. It’s a delicate balance.
The federal funds rate is the rate at which banks lend to each other. A jump in this rate does not automatically mean a bump in mortgage rates, or at least not at the same amount, but they do tend to move along the same trend lines. Mortgage rates are more tied to the Bond Market, though people tend to confuse the link. Still, with this latest adjustment, we can assume that mortgage rates will continue to rise.
What’s important to keep in perspective here is that rates are still actually quite low historically. As you can see in this chart from Freddie Mac, rates are only now approaching what they were in the mid-2000s. In fact, the overall average rate since 1971 is just short of 8%, considerably higher than where we are now. And back in the ‘80s, mortgage rates were in the double digits. Ouch!
As we discussed last month, increasing rates can have a positive impact for buyers. Because monthly payments may be higher, some buyers get the jitters, and bidding may be less aggressive, with fewer buyers coming to the table, and therefore less overbidding.
This may also mean an increase in inventory, as properties are not snapped up as feverishly as they have been lately. The price that homes sell for is less of an indicator of the market (due to the lag of data), but trends of homes going into contract and being sold are a better metric. Both of those showed an uncharacteristic drop in April.
Once rates stabilize, values in the Bay Area tend to rise swiftly. Even in down economies, values in San Francisco in particular rarely drop, but may at least plateau, making properties more accessible for buyers. Already inventory is ticking up, especially condos.
One way to get ahead of the rate changes is to look at different loan programs. Currently, 7-10 year ARMs are a better deal than 30-year fixed mortgages, and can give you breathing room to wait out the rate shifts.
What you do want to be careful of is the other ways that rate changes can impact you. If you already have an ARM loan whose term is about to end, it will revert to a variable rate loan. Consider refinancing and locking in as low a rate as you can now, in anticipation of future hikes. And if you have more volatile debt like credit card balances, do your best to pay it down or perhaps call the lender to see if you can negotiate a more favorable rate. These are areas where rate changes are more immediate and costly. By being proactive and controlling your debt, you improve your buying power and put yourself in a better position as a prospective buyer when the time comes.
There’s no way to game real estate, but a turbulent financial environment can present opportunities for those looking to jump into a less competitive market.