What today’s market means for first-time home buyers

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Mortgage interest rates have nearly doubled over the past 15 months, throwing a curveball to first-time buyers who were trying to cope with skyrocketing home prices and were hoping for their shot at achieving the American Dream of homeownership.

First-time buyers made up 34 percent of all home buyers, according to the “2022 Home Buyers and Sellers Generational Trends Report” by the National Association of Realtors. The majority of first-time buyers are millennials.

As we write this, mortgage interest rates have dropped slightly. According to Freddie Mac’s Primary Mortgage Market Survey, the 30-year fixed-rate mortgage averaged 5.25 percent for the week ending May 19, with an average of 0.9 points. (A point is 1 percent of the loan amount.) The 15-year fixed-rate mortgage averaged 4.43 percent with 0.9 points, and a five-year ARM averaged 4.08 percent with an average 0.2 points.

Here’s something most first-time buyers don’t realize: If you have a lower credit score, the interest rate on your loan is going to be higher. For someone with a credit score of 700 to 719 with 20 percent to put down, the average rate on a 30-year fixed-rate mortgage on May 19 was 5.833 percent, according to Bankrate. For someone with a credit score of 660 to 679, the average interest rate was 6.66 percent. But for people with credit scores of 800 or above, they might have been able to secure an interest rate of around 5.5 percent.

These numbers are a little different from the Freddie Mac survey, because that survey also quotes the average number of points paid to secure those interest rates. The more a borrower pays in points, the lower the interest rate. The Bankrate numbers don’t quote interest rates with points, so the average rates appear higher.

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You might also want to compare rates in your area for jumbo vs. conventional loans before choosing a loan product. In some markets, the interest rate may be lower on one type of loan than another. (A jumbo loan, in many markets, is a loan that is at or under $647,200 for a single-family home. It can be as high as $970,800 in high-cost areas.)

Some lenders offer better interest rates for loans that have a lower loan-to-value ratio. They also charge a higher interest rate for loans with less than 20 percent equity, so it pays to shop around and ask as many questions as possible to get the best mortgage program for the home you’re buying.

That difference is why it’s critical to ask prospective lenders about the interest rates, points, fees, special loan programs and any other costs associated with approving your loan.

Although interest rates have jumped faster than most economists expected, home prices have also risen, adding to the financial pressure first-time buyers are feeling.

According to the Federal Reserve Bank of St. Louis, the median sales price of houses sold in the United States reached $428,700 in the first quarter of 2022, up from $369,800 a year earlier. That’s a jump of 15.9 percent.

And although home price appreciation has slowed somewhat from the blistering pace at the end of 2021, home values have been growing at a healthy pace since the end of the Great Recession.

Some of our readers have questioned whether rising interest rates will cause home values to fall, as they did in 2008 and 2009. In those years, median home prices fell just over 10 percent per year. (Home prices fell a lot more in some locations than others.)

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Sadly, for first-time buyers struggling to find any home to buy, Lawrence Yun, chief economist at the National Association of Realtors, doesn’t believe we’re going to see a drop in housing prices. Why? Because demand has far outstripped supply, and the quality of borrowers has remained high.

“The underwriting standards are so strict throughout the process, there is unlikely to be any massive forced sales. Also, the inventory levels are at historic lows. Even as the demand drops, it means a change from 20 multiple offers to one or two bids after 30 days on market,” Yun said, noting that this level of competition is much more “normal and consistent with 5 percent or so home price appreciation.”

But he also acknowledges that if the Federal Reserve hikes interest rates, even more aggressively than the seven planned hikes, some housing markets could see some minor price declines; however, he thinks buyers will jump in for a “second-chance opportunity” to be a homeowner.

“In places like Phoenix, where home prices have shot up by more than 30 percent in a single year, a price decline of 5 percent or 10 percent, if it were to occur, would not create financial stress. Just as a stock price zooming up 30 percent and then giving up some [of the gain] does not cause any financial stress,” Yun said. “Only sustained large price declines would be trouble, as happened during 2008 to 2012 with the mortgage implosion and foreclosure crisis.”

Of course, if you stretch to buy a house, only to watch its value decline while you live there, you’re going to be upset. Instead, try to view your house as a long-term purchase. It’s the place you’re going to live, set down roots and enjoy your life.

Hopefully, by the time you’re ready to sell, the value of your home will have at least kept pace with inflation.

Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (Fourth Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, bestmoneymoves.com.

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