Higher mortgage rates mean the cost to buy a San Diego home is more expensive than a year ago but it isn’t clear yet how, or when, it will affect the red hot housing market.
It’s an untypical time for the home market as mortgage rates climb at the same time as prices. That’s the opposite of how it’s supposed to go and it’s uncharted territory for buyers and those in the real estate industry.
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The average rate for a 30-year, fixed-rate mortgage was 5.3 percent Thursday, said Freddie Mac, up from 2.94 percent a year ago. That means the monthly cost for a median-priced resale condo at $640,000 — assuming 20 percent down — would be around $3,126, up from $2,425 a year earlier.
Two things you might expect to happen in San Diego haven’t: That so many homebuyers would exit the housing market that it would lower prices, or that there would be a lot more homes not selling, which would limit competition.
Instead, buyers across the nation — since January — have been rushing to buy homes before rates go up more and have created the hottest market of any point of the pandemic.
In April, 74 percent of San Diego County homes sold within two weeks, said the Redfin Data Center, much faster than at any point in the last four years. There were 2,952 homes for sale during that time — a slight increase from January’s 2,200. But inventory remains well below levels from the same period last year when there were 3,793 homes for sale, and also below the 5,961 homes for sale in 2020 and 8,030 in 2019.
Chris Anderson, board president of the Greater San Diego Association of Realtors, said it’s still a sellers’ market out there with most homes getting multiple offers even as mortgage rates rise. Even slight drop-offs in offers are doing little to change the homebuying climate.
“Instead of getting 30 offers on a place, you’re getting 15,” she said. “It is just way too tight of an environment. We have hardly any inventory.”
Anderson said the lack of homes for sale is keeping pressure on the market, even though a few buyers may have fallen out of the running with rising rates. Even with monthly mortgage payments higher than before, she said many buyers see it as a better alternative to renting — which has also seen significant gains in the last year. Rent in San Diego County is up 13.6 percent in a year, said real estate firm CoStar, to an average $2,263 a month.
Housing analysts say if rates get high enough, or buyers have a change of heart about homeownership because of rising costs for just about everything else, it may eventually slow the market. That hasn’t happened yet.
Matt Shaver, a mortgage adviser with Finance of America, said his refinance applications have nearly completely dried up, down to two compared to 15 at the same time last year. However, he is processing seven purchase mortgages, exactly what he had in early May last year.
“It’s still really busy,” he said. “It’s still crazy.”
However, Shaver said rising mortgage rates are starting to edge buyers out of the market.
“I have buyers getting priced out. It’s a reality,” he said. “I have ones really pushing the envelope with their debt-to-income ratio. Rates have been hammering them. That home you wanted for $450,000, then you can only afford $420,000, now it’s down to $400,000.”
As bad as things might seem for Shaver’s clients, mortgage rates have historically been much higher than they are right now.
For instance, the rate for a 30-year, fixed-rate mortgage was 9.9 percent in March 1988. That doesn’t mean the cost to buy a home was more expensive back then, even with higher interest rates. In March 1988, the median home price in San Diego County was $131,000, about $325,092 when adjusted for inflation in today’s dollars. As of March 2022, the median home price in San Diego County was $805,000.
Will mortgage rates continue to rise?
It is difficult to say what will happen with mortgage rates in the next few months, with many leading economists disagreeing.
Conventional wisdom states mortgage loan rates are more likely to rise than fall in the near term because the Federal Reserve has indicated it is taking an aggressive path to curb inflation. It raised its benchmark interest rate by half a percentage point last week, its biggest hike in two decades.
Mortgage rates usually follow the yields on mortgage-backed securities. These bonds typically track the yield on the U.S. 10-year Treasury.
A higher rate means more than just a monthly payment change — even though most buyers shop with that in mind — but also limits borrowing capacity.
Financial website Nerd Wallet broke it down this way: If a borrower who could only afford a $1,700 monthly payment started shopping for a house in February (with rates around 4 percent), the buyer could afford to borrow $356,100. At 5.25 percent, the same borrower can now only afford a $307,900 mortgage — losing $48,200 in borrowing capacity.
Buyers rushing out to purchase a home before rates go higher might want to consider there isn’t a consensus on what will happen. The Mortgage Bankers Association predicted mortgage rates in mid-April will be 4.8 percent to end the year. Economist Lawrence Yun of the National Association of Realtors told Forbes last week he forecasted they would be 5.5 percent by the end of the year.
The Federal Reserve said it plans to keep raising rates, in order to curb inflation, but some economists think it will stop if there is some world crisis. Some examples would be another COVID-19 surge or escalation of war in Eastern Europe. Alan Gin, an economist at the University of San Diego, said those events could dissuade the Fed from continuing its current course of action.
“If we get these outside events, that might damper what the Federal Reserve is going to do,” he said, “they might take the view that we can’t risk a big downturn in the economy due to these outside events.”
Gin said other forecasts on mortgage rates might be too optimistic, especially considering how quickly rates have gone up in the last week. Most forecasts were done more than a week ago or in April, making Gin think rates could be closer to 7 percent by the end of the year, considering the recent escalation.
Potential strategies for buyers
Homebuyers have a few options to navigate rising mortgage rates, Shaver and other analysts say. While these options won’t work for everyone, here are a few ideas:
- Shop around for the best interest rate: Rates changed so quickly that not all lenders are at a uniform level, Shaver said. That allows a potential buyer to shop around for the best rate. “It’s like the Wild West out there,” he said of rates being all over the board.
- Ask for a seller credit: This might be a tough strategy, considering San Diego homes are still selling quickly, but it doesn’t hurt to ask a seller if they would knock some money off the purchase price. Shaver said he recently had a buyer succeed in doing this on a $900,000 Little Italy condo that had been on the market for 66 days. If a home has been sitting for a long time, and the seller really needs to sell for some reason, this scenario might work.
- Buy down the interest rate with “points”: It is possible to get a lower rate if the buyer is willing to pay for it. Lenders often allow purchasers to pay up front to have a lower rate by purchasing points. A mortgage point typically costs 1 percent of the total mortgage amount. When you buy points, you instantly get a lower interest rate. This means a lower monthly mortgage payment and over the life of the mortgage can save money in the long run. But not always. Shaver said the reason he finds this option a tad riskier is if mortgage rates decline, the owners can refinance in a few years, and might not get the cost savings they were looking for.
- Get an adjustable rate mortgage: This type of mortgage makes most of us who lived through the housing bust of 2008 shudder. The loans start at a lower rate (around 3.98 percent as of Thursday, said Freddie Mac) during the first five to 10 years of the loan, and then start adjusting to the prevailing rate plus a margin. The thinking was — back before the housing crash — that people could either refinance into a fixed-rate loan when the adjustable term was over or they would sell the home. With rising rates, adjustables are getting popular again: Mortgage Bankers Association says ARM loans are making up 10 percent of recent applications, compared to 3 percent at the start of the year. Shaver said the loan works best if the person plans to sell the home after a short amount of time or refinance as soon as rates start ticking up. ARM loans received a lot of the blame for the subprime housing crisis because many people found themselves with homes they couldn’t afford when their rates adjusted — and the bubble burst. Back then, many were poorly underwritten, interest-only loans that had short teaser rates. Today, most ARMs are underwritten like fixed-rate mortgages, and they require a down payment.
In a white paper released this week, Zillow senior economist Jeff Tucker wrote that high-interest rates and other changes in the market may start to make things better for buyers — possibly limiting the need to explore options like an adjustable-rate mortgage.
He wrote that the nationwide number of homes for sale has been increasing since March, a sign that the market is finally cooling. As expected, San Diego’s inventory numbers aren’t going up as much as some areas of the nation, but they are increasing. Tucker said an escalation in the number of homes for sale might not mean a big change in prices, but it will at least give potential buyers a break on bidding wars.
“That doesn’t mean a housing crash is coming or even that prices will fall,” Tucker wrote, “but rather that the pace of price growth is likely to decelerate and more homes will be available for sale.”