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The Fed is holding steady on interest rates and home prices remain at historic highs. That means prospective homebuyers can expect to face high mortgage rates and a very competitive market for affordable homes for now. But I’m telling my clients that doesn’t mean all hope is lost. There are signs the situation may improve later this year.
Key Takeaways
- The Fed’s interest rate stance is holding steady for now
- Pent-up demand and a shortage of available homes has kept property values high despite the climbing interest rates
- Home builder sentiment is on the rise and consumers increasingly expect rates will go down later this year
- Now is the time to confirm my clients have the funds and documents they’ll need for a quick approval and close
In the current interest rate environment, the Fed’s anticipated “higher for longer” stance signifies a shift from the historically low rates we’ve seen in the past years. With rate cuts seemingly off the table until later in the year, the era of 3% mortgage rates has surely ended. Yet, the underlying demand for affordable housing remains robust.
Theoretically, rising interest rates should curb the affordability of homes, as they increase the cost of borrowing. This tends to cool down overheated housing markets by diminishing demand—prospective buyers might postpone their purchase in hopes of a more favorable economic climate. However, this typical market response is not what’s unfolding currently. A combination and continuation of pent-up demand and a shortage of available homes has kept property values soaring despite the climbing interest rates.
Thin inventory, which has kept prices elevated, can partly be traced back to current homeowners who have locked in lower rates through refinancing. They have little incentive to sell and face a higher rate on a new mortgage, contributing to the shortage of homes on the market. This scarcity of inventory ensures that home prices remain at historic highs, even as borrowing becomes more expensive.
What I’m Telling My Clients
There is some good news, however. Home builder sentiment appears to be on the rise, while mortgage rate optimism is increasing. The most recent survey from the National Association of Home Builders (NAHB), showed an increase from 37 to 44 in January. A reading of 50 or above generally means builders see positive conditions ahead for new construction. Meanwhile, the latest Fannie Mae Home Purchase Sentiment Index (HPSI) displayed a survey high. Some 31% of consumers said they expect mortgage rates to decline further from their 2023 highs of 7.79% on a 30-year fixed mortgage.
Regardless of my client’s home buying timing, there are some things they can do to prepare. Together, we will confirm they have the downpayment, fees, and three-plus months of mortgage payments ready to go. And they’ll need to gather all the documents they need for quick approval and closing when the time is right.
The Bottom Line
For my clients who are prospective homebuyers in today’s market, the challenge is twofold: navigating higher mortgage rates and finding affordable homes with limited supply. Despite the high-interest rates, the demand persists, driven by a fundamental need for housing combined with a market that cannot supply enough homes to meet this need. Buyers are caught in a squeeze between the desire to purchase in a higher-rate environment and the reality of high home prices, making it a complex market to navigate. For those who can wait to buy, they may be able to reap the benefits of a lower mortgage rate.