Broadcast Retirement Network’s Jeffrey Snyder discusses the impact of affordability, inventory and mortgage rates on the Spring homebuying season with Bankrate’s Ted Rossman.
Jeffrey Snyder, Broadcast Retirement Network
Ted Rossman joins me from Bankrate this morning. Ted, so great to see you as always. Thanks for joining us.
Ted Rossman, Bankrate
My pleasure. Thanks for having me.
Jeffrey Snyder, Broadcast Retirement Network
And I heard a rumor that you’re going away for, what is it, spring break with your kids?
Ted Rossman, Bankrate
Yeah, we’re taking the kids to Disney World, so they’re very excited.
Jeffrey Snyder, Broadcast Retirement Network
Oh, it’s a small world. When you come back to the program next month, you can tell me if it’s a small world is still up and running, because that was a little boy. I think it is.
Yeah, I think it is still there. Okay, well, and I know that 20,000 leagues under the sea, they got rid of that one, which I’m pretty sad about. I used to like that one too.
All right, Ted, always great to talk to you about interest rates, credit cards, and the like. Today, I want to focus our conversation on mortgage rates. Obviously, a lot going on geopolitically, but that has an impact on interest rates, and these are the mortgage rates that we’re paying.
Ted Rossman, Bankrate
There are some really interesting things going on with the spring home buying season. Mortgage rates, unfortunately, have been going up in recent weeks, largely because of the conflict in Iran. So the theory being that higher oil and gas prices are going to be inflationary, that’s going to lead the Fed to keep rates higher.
Investors are pushing rates higher just because of higher inflation expectations, and that has a direct impact on mortgage rates. Freddie Mac said that in February, the average 30-year fixed mortgage rate briefly fell below six percent for the first time in about three and a half years, and that was getting some people off the sidelines, was getting some people kind of excited about buying or selling, and sadly, since then, rates are up about half a point. So, you know, we need to stay tuned for what moves are next, but some of this is just emblematic of broader affordability issues, and also those golden handcuffs that a lot of current homeowners have.
Like, if you’ve been in the same home for a while, and you refinanced during 2020 or 2021, and you’ve got a three or four percent rate, people are very reluctant to put that home on the market right now.
Jeffrey Snyder, Broadcast Retirement Network
I want to get to affordability in a second, Ted, but let’s talk about home buying season. This is typically the go-to season for homebuyers, right? I mean, you try to get into a home over the summer, and then before, if you have kids, before school starts.
Ted Rossman, Bankrate
Yes, exactly, and one thing that’s been constraining the market for years is low inventory, and that’s still an issue. It’s not as bad as it was a few years ago, but it’s still pretty low, and this does relate to some of those golden handcuffs of low rates. Right now, about 70 percent of existing homeowners have rates below five percent.
Fifty percent have rates below four percent. Those are exceptionally low rates. We’re not going back to the threes anytime soon.
I do feel like six percent is a bit of a psychological tipping point, because mortgage rates are important, but it’s not the only thing that goes into this decision, of course. I mean, sometimes it’s moving for a job opportunity. Sometimes it’s having kids and needing a larger home.
Sometimes it’s your kids move out, and you’re ready to downsize as you get older. There’s all these different motivations. Some of it may be climate or weather or just seeking a change, but there is this stay-in-place kind of effect that has been persisting because rates have moved up a lot.
Prices have moved up a lot. There’s not that much on the market, so there are some legislative fixes pending about building more homes. It’s going to take a while.
Right now, I do think if rates were to fall noticeably below six, if we were to get back to the upper fives or the mid-fives, that might get some people off the sidelines. We were almost there in February, and then we started to go the other way.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and as you said, a lot of it was the hot inflation numbers, the geopolitical events occurring in the Middle East that have their ramifications, as you said, leading to inflation. What about that rent-to-buy decision? Is that impacted?
Are more people going to sit on the sidelines? You said 6% is kind of like the psychological barrier. What about rents?
Are rents going up? I would think that landlords want more money to offset some of their inflation that they’re experiencing.
Ted Rossman, Bankrate
The pendulum has swung in favor of renters these days. Even though rents are going up, they’re not going up that much. Comparatively speaking, renting is actually cheaper than buying pretty much everywhere across the country right now.
So that is an option. I know people want to buy a home, and a lot of people aspire to do that. But honestly, it’s better to rent another year or two than it is to buy too early, because homeownership is very cost-intensive.
You end up putting a lot of money into the down payment and maintenance and repairs and taxes and insurance. And I mean, yes, there are benefits. There’s stability.
There’s hopefully being in a good neighborhood. There’s sticking around for a while, fixing your costs if you have a 30-year fixed-rate mortgage. But renting is not throwing your money away.
Right now, renting is actually a comparative bargain in just about every market we look at.
Jeffrey Snyder, Broadcast Retirement Network
I tend to like renting, and I’ll tell you why. I’m kind of in that category, and my wife and I are in that category, where I don’t want to have to get up on the roof. I don’t want to have to replace the roof after 20 years for $30,000, $40,000.
I like to be able to call the repairman or the maintenanceman, whatever they call it these days, to come in and fix my dishwasher. I think that you get the sense that maybe there are some generations of people, Ted, that like that, maybe millennials or Gen Zers that maybe don’t have that in their future.
Ted Rossman, Bankrate
Yeah, it certainly could be. I mean, it’s very an issue right now when we think about boomers, who by many estimates should be around the time to downsize, but many are not doing so in ways that we thought. Now, we’re actually starting to see in markets like California, about 20% of home sales in California right now are actually inheritances, whether that’s someone who passes and leaves their home to heirs, or maybe it’s more of a within-the-family kind of sale.
Now, California is a very high-cost market. It’s really kind of a microcosm of where this effect is really amplified. The Wall Street Journal did a story recently that made the conclusion that it’s almost like, sadly, one of the best ways to afford a home in California is to have an older parent pass it on to you.
But these are some of the sort of structural imbalances in the housing market right now. You do have a lot of boomers holding onto homes that maybe they otherwise would have sold, but even downsizing is not always a bargain. Just when you think about whatever you’re going to be buying costs a lot more.
If you’re taking out a mortgage, that rate is going to be higher. I mean, even if you’re moving from a single-family home to a smaller condo or something like that, if that condo is appreciated a lot in price, and if your mortgage rate is going to be a lot higher, it’s just contributing to the low inventory, I would say.
Jeffrey Snyder, Broadcast Retirement Network
Ted, Jerome Powell and the Fed kept rates, I think, unchanged this last go-around. Let’s just say hypothetically that there’s a change. Either it goes up or goes down because of the inflation number.
How long does it typically take? Because the mortgage rates don’t always move in parallel with the federal funds rate. Is there a lag of several months for rates to come down?
Let’s just say, hypothetically, they decide that the inflation number looks good, and then bring rates down.
Ted Rossman, Bankrate
Mortgage rates are tied more to 10-year treasury yields than to what the Fed is doing. Now, it’s related, of course, because investors who said treasury yields are looking at the Fed and other economic indicators, there’s a lot of overlap. But it’s not as direct of a pass-through as, like, when the Fed changes rates, your credit card changes pretty much right away.
So, they’re kind of reading some of the same tea leaves with inflation. Right now, the expectation is that the Fed may not cut at all this year. Maybe they sneak in one quarter point cut late in the year.
There’s a lot of uncertainty. Uncertainty with Fed leadership. Jerome Powell’s term is supposed to end in May, but there’s been some issues confirming a successor hung up with that existing investigation.
There’s a lot of uncertainty about the war and inflation and just sort of where everything is headed. But best guess right now is a relatively static rate environment. So, if that means that rates plateau for mortgages in the mid-6s, maybe low-6s, I mean, that’s not great.
It’s not as bad as a few years ago when rates briefly hit 8%. But we really thought below 6 was achievable this year. It still is for the well-qualified borrower.
We should underscore that point, that we’re talking about averages here. So, even if the current average is around 6.5, if you have really good credit, if you shop around, you can get something in the upper 5s. It’s all the more important to put your best foot forward from a credit scoring standpoint, and you’ve got to shop around.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, shop around. But also, you hit nail on the head, get that credit card debt down, improve your credit score. You’re going to get the higher your credit score, the more optimum you will get in terms of a borrowing rate.
That’s just basic economics and finance. Ted, we’re going to have to leave it there. Wishing you and your family the best in Disney World.
Maybe we’ll have you do a show on whether it’s a small world and how the rides are. How about that?
Ted Rossman, Bankrate
That would be fun. Yeah, thank you.
Jeffrey Snyder, Broadcast Retirement Network
It would be fun. You can go from bank rate analyst to Disney ride analyst. Anyway, Ted, I’ve got to go.
Ted Rossman, Bankrate
I like it. Good to see you, as always.
Jeffrey Snyder, Broadcast Retirement Network
Thanks for joining us and enjoy your vacation.
Ted Rossman, Bankrate
My pleasure. Thank you.