Interest rates have dominated headlines in 2022 as they’ve climbed to levels not seen in over 20 years. For home buyers, interest rates play a significant role in affordability. Over the past several months, this rapid rise in rates has led many potential home buyers to pause their plans.
To help provide expertise on where interest rates stand today and what the outlook is for 2023, Stig Sandell and Brad Goulet from Bell Bank Mortgage share their insights. With over 20 years of experience in the mortgage industry, Stig and Brad offer a unique perspective on how interest rates are impacting home buyers.
Where Are Interest Rates Today?
Stig explains, “We recently saw the fastest spike in interest rates ever recorded, hitting over 7% for 30-year fixed mortgages.” This exceeds the 20-year high for mortgage interest rates. According to forecasts from the National Mortgage Bankers Association, rates could retreat into the mid-5% range by the second or third quarter of 2024.
So, while interest rates have climbed considerably this year, relief may come in 2024. But in the meantime, today’s high interest rates for home loans present challenges for buyers.
How Are Home Buyers Reacting to High Interest Rates?
Brad estimates that of 10 pre-qualified buyers looking to purchase a home, 3-4 are currently on the sidelines. The high interest rates for mortgages make home ownership less affordable. But he says the other 6-7 buyers are still moving forward if they can swing it. These buyers realize rates won’t stay elevated forever.
According to Stig, first-time home buyers are the most affected by the housing interest rate jump. Pre-approvals they received last year based on lower rates no longer work with today’s interest rates. This pressures first-time buyers the most. Move-up buyers in higher price ranges have more flexibility to absorb the increases.
Brad notes that life events like marriages, divorces, growing families, or job relocations still drive buyers this year. Interest rates play a role, but they aren’t the only factor. He advises buyers if they can afford to buy now, it’s better to own rather than potentially pay more in the future when rates decline.
How Can Buyers Navigate High-Interest Rates on Home Loans?
For buyers who still want to purchase despite higher interest rates on mortgages, Stig and Brad offer tips. One option is a temporary interest rate buydown. This involves the buyer or seller paying discount points upfront to lower the interest rate for the first 1-2 years.
Brad explains that each 1% reduction in interest rate typically costs about 1% of the loan amount. On a $400,000 mortgage, buying the rate down from 7% to 5% would cost around $8,000. After the buydown period, the rate reverts to current market levels.
Being pre-approved and ready to act quickly when the right home comes along can also improve chances in competitive markets. Working with an experienced real estate agent and mortgage lender guides buyers on the best strategies for current conditions.
What is the Outlook for Interest Rates in 2023-2024?
Though short-term forecasts call for interest rates to remain elevated, Stig and Brad expect rates to begin improving in 2023. As the 2024 election cycle ramps up, Stig anticipates interest rates dropping along with gas prices. Mortgage rates in particular, tend to decline in election years.
If inflation also cools off and hits the Fed’s 2% target, they see a potential wave of pent-up demand unleashed. Stig believes once rates fall back into the 5% range, there is risk of buyer “chaos” reemerging. So 2024 could prove to be a strong seller’s market once again.
Critical Takeaways for Home Buyers
– Don’t assume interest rates will fall immediately – they may remain high for some time.
– If buying a home now fits your budget and life plans, move forward despite higher rates.
– Work with experienced real estate and lending professionals to understand all options.
– Monitor forecasts closely for any downward rate trends developing.
– Be ready to act quickly when favorable conditions return.
While inflation and rates are expected to fall through 2023-2024, the precise timing is uncertain. Stig and Brad emphasize home buyers should focus on their situations and avoid trying to time markets. Patience and guidance from experts can help buyers navigate today’s rising interest rate environment.
