Friday, 29 May 2020

Mortgage market to yield a ‘sweet spot’ for first-time home buyers in 2018

Written by Posted On Wednesday, 28 March 2018 11:45

House hunters looking to buy their first homes should not worry about the Federal Reserve Bank’s move to gradually raise interest rates.

In fact, first-time buyers should be on the lookout for the interest rate “sweet spot” – it’s coming soon. The sweet spot is the point in time when interest rates are not too low (making it too difficult for potential buyers to qualify for mortgages), and not too high (resulting in sky-high monthly mortgage payments).

With that sweet spot on the horizon, house-hunting time is now!

But if first-time buyers wait too long, they may miss the sweet spot and slide right into high interest rates.

Make no mistake: We’re not headed for a housing boom any time soon. That’s good, because we all know that boom’s eventually end in busts. But with a sweet spot, like a boom, timing is key in maximizing the benefits before the winds of change blow and mortgages with reasonable payments move out of reach for most people.

We’ve already seen the low side, when rates reached all-time lows. This was especially true in the post-2008 recession days, once the United States’ recovery started to gain traction around 2014. As 2018 began, 30-year rates remained below 4% for 26 continuous weeks, according to Freddie Mac.

During the week ending March 1, 2018, the 30-year fixed rate mortgage rose by 3 basis points to 4.43%. Compare that with 4.40% the previous week, and 4.10% during that same time last year.

Even if rates creeped up to 4.5%, give or take .25%, that would still be much lower than the where 30-year rates were in mid-2007 (in the middle of the last stock market boom). Back then, they were approaching 6.75%. Rates above 8% were not uncommon in 1999, also within another boom.

For first-time home buyers to know what to do now, it would help to understand why the Federal Reserve is inching up the rates. In this case, it’s to cool off an economy that’s poised to overheat in the near future – especially given the really low unemployment and rising wages, albeit slowly rising.

At the same time, inflation, the rise of prices of goods and services – which pushes up the cost of living – could be about to jump. So, the Feds have to step in and do something.

What does inflation have to do with interest rates? Here’s how it works: Inflation gobbles up investors’ return on investment, particularly fixed-rate investments such as mortgage bonds. When inflation-driven price hikes occur, those mortgage-based securities get devalued more and more. To keep investors buying, rates on those sort of assets are increased. And that rate increase gets passed on to residential and commercial mortgage shoppers.

Because the goal is to cool off a very warm economy that, for the most part, is headed in the right direction, it is clear that the Feds are less likely to do a very steep increase in one big spike of a rate hike. It’s likely to be small and gradual increases – making it easy to find that sweet spot just by paying attention.

Another reason for first-time buyers to jump into the housing market when the interest rate is right for them is because entry-level buyers are looking at a possible shortage of homes affordable to them. January 2018 is a good snapshot in time to see how inventory of starter homes has taken a slight stumble. During that month, inventory of these homes fell by 8% compared to where it was in January 2017, according to a recent Forbes business report. Part of this inventory depletion is likely due to the earlier-than-normal start of the home shopping season, which typically starts in the spring time.

It also appears that the amount of mortgage applications have decreased as recently as a few weeks ago. That’s also likely to be attributed to the slightly fewer entry-level homes up for sale.

With fewer people shopping, deterred by the small drop in starter-home inventory, and fewer people putting in mortgage applications, that leaves it more wide open for smart home hunters who don’t give up the search and find that mortgage rate sweet spot.

The time is ripe, or is about to be, for most first-time buyers who have a good-paying job, who have a really good credit rating and a really good credit history. Having a good down payment makes things even better for those first-time buyers.

Here’s the bottom line: If you find a house you like, and the price is right … and the interest rate is right for you, go for it! Lock in that rate before that sweet spot sours with higher rates that put a nice home with a reasonable mortgage rate out of reach. It could be a long time before you find your interest rate sweet spot again.

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