What's Happening to Mortgages and What To Know

  • Timothy Farnham
  • 02/24/22

What’s Going On With Mortgage Rates?

Several clients have asked me about mortgage rates and their impact on the market, or them as buyers.  As most know, rates have increased since the beginning of the year as shown by Freddie’s weekly Primary Mortgage Market Survey. According to the latest survey, the average 30-year fixed-rate mortgage has risen from 3.22% at the start of the year to 3.69% as of last week. This impacts purchasing power for many buyers.  For example, the chart below shows the loan amount one can afford given a monthly payment (of P&I) and the interest rates:

 

From the chart above, you can see that if your monthly mortgage payment is fixed at $7,000 per month, a 0.25% increase in interest lowers the total loan amount by about $50,000, or just under $10,000 per $1,000 of your payment.

Can You Predict Future Mortgage Rates?

While nobody can precisely predict where and when mortgage rates will go, a good indicator is looking at the 50-year history of the 10-year treasury yield. Its path gives us an understanding of the trajectory of the rates.  This is because there is a correlation between mortgage rates and the 10-year treasury yield.

As we have seen, treasury yield started to climb in January, and that’s driven rates up. As of last Thursday, the treasury yield was 1.81%. That’s 1.74% below the mortgage rate reported the same day (3.55%) and is very close to the average spread we see between the two numbers (average spread is 1.7).

Fun Facts Tim, But What Does That Mean for Me?

As interest rates go up, buying power goes down.  Meaning, if you hold off on buying you’ll end up paying more in two ways… The first is that despite all this talk about rates going up, home prices are still going up.  This is because almost half of all homes in San Francisco are still being bought with cash.  So interest rates only affect half of the buyers.  The other reason is that for the same purchase payment, the purchase price of the home is falling with every interest rate hike.

So What Can I Do?

I have a few tips for first time home buyers right now:

  1. Get pre-approved BEFORE you start looking at homes.  I have literally never worked with a client that was getting a loan that knew exactly what they could afford.  Unless you are a loan officer yourself, your guess is going to be over, or under what you can really afford.  Making this your FIRST step helps you know what you can afford.  I have a convenient list of lenders here.  But in any transaction, you are free to use whatever lender you like!
  2. Focus more on what they CAN afford.  In the San Francisco market, it is more important to get in, than to try and get everything on your want list.  Yes, we all want plenty of space, a 2+ car garage, and a fresh remodel straight out of the magazines, more bedrooms than people, and at a “good price.”  So if this is your first home, think about it as a starter home. If you can’t quite afford exactly what you want now, pick something that works and stay in it for 3-5 years.  The equity you build in your first one will get you to where you want to be and the appreciation alone will give you a solid financial foundation for your perfect home.
  3. Be reasonable about what you can get for your budget.  Look at homes listed 10-20% below what you can afford.  Also, look at the homes that SOLD in the past 3-6 months.  A list price shown by online property search websites is simply a marketing number to attract people to the home.  As I report in my Monday Morning Market Update, in the $1-2M Single Family Home market segment, homes that are sold within 30 days of the list are selling 25% OVER the asking price.  So that you saw that listed at $1.4 actually sold for $1.7M.

Conclusion

Early actors get the rewards in Real Estate.  Those who bought a year ago have already seen 7-15% gains in the value of their property.  If you are concerned about interest rates going up, it’s advised to act now and not try to wait out the market, as that is one of the biggest mistakes to make in San Francisco real estate.  Laws of supply and demand are forcing prices up, as there is still a major shortage of housing in San Francisco with no clear path to increasing the supply of homes.

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