The Mortgage Interest Rate Dilemma

Interest Rates

This past week, we saw an increase in mortgage rates following a rise in bond yields driven by investors’ concerns that high interest rates and inflation will linger longer than expected. On Friday, the current average interest rate for a 30-year fixed-rate mortgage was 7.57%; for refinance loans, the average rate amounted to 7.8%. Effectively, mortgage rates have hit their highest point in nearly 23 years, according to Bankrate.com. Obviously, rates vary widely across lenders, and it’s always wise to compare rates regularly. 

On a national level, this increase is the highest since December 2000, which has brought mortgage applications to a 28-year low, as reported by The Mortgage Bankers Association. Keep in mind the lowest 30-year fixed rate ever was 2.65% in January of 2021, likely due to the effect of COVID-19. However, when you look at today’s rate, it certainly is not good news for consumers looking to enter the late summer housing market. When I look around the Lakes Region and talk with many Realtors®, the consensus is that higher rates are hitting potential buyers hard, especially after the pandemic inflated the local prices in the housing market. 

Around the Lakes Region in 2020, we experienced multiple rate increases one after another, probably totaling ten to twelve increases, and that set off a frenzied home-buying process in the region that spiked our selling prices to increase over 40% from the start of COVID-19. We did see prices pull back for a short time; however, because of the short inventory supply, still strong demand, and the large number of cash sales we have in the Lakes Region, asking prices have not dropped enough to offer a decent entry point given the high interest rates. 

I noticed some sunlight this week with 76 new real estate listings entering the market in the last 7 days for 14 Lakes Region towns I pulled, which will help. However, we still have many current property owners who are reluctant to list their homes for sale because the majority of them have interest rates hovering around 3%, and if they purchase another local home, the prices are still at record highs, plus the interest rates are more than twice of what they currently have. This has led to the common phrase ‘golden handcuffs’ referring to potential sellers. With today’s average rate at 7.57%, it’s already 2% higher than last year’s rate of 5.5% at this time.

Nationally, it is estimated we need 4.3 million more homes; according to a Zillow analyst, there are simply not enough homes for millions of people. In the Lakes Region, we have a huge shortage of smaller, more affordable starter-type homes, and unless we come up with a creative solution we risk leaving families without a seat, and it will only get worse over time. Our recent dilemma with interest rate increases only compounds the problem. It bumps out so many families from the qualifying process. 

For example, a buyer today faces a different mortgage scenario. Take a $350,000 purchase with 20% down and 80% financed ($280,000) at 7.57% for 30 years. The monthly payment would be $1,971/month. Compared to just a year ago, the payment would have been $1,590/month at 5.5%, and going back to July 2020, it would have been $1,180/month at a 3% interest rate. That’s a big difference, and it puts a big damper on those struggling with housing affordability, especially with such high prices. 

Lawrence Yun, the Chief Economist at the National Association of Realtors®, said recently, “We are at a critical juncture where we could break higher up to 8%. The future path of rates depends on the 10-year Treasury yield and on what the Fed does at its September 20th meeting.” On Friday at Jackson Hole, CNBC reported that Fed Chair Powell calls “inflation too high and warns that we are prepared to raise rates further.” That’s not encouraging news, considering interest rates have just about tripled since January of 2021, when they were at 2.65%. Back then, we were telling everyone to jump on it; you will never see these rates again.

So there we are with the dilemma of our current interest rate for mortgages. The Fed doesn’t directly set the fixed rates; however, the Fed does set the tone, so we will keep a close eye on September 20th. In the meantime, there is a positive note for savers: the interest rates on CDs and Short-Term Treasuries are very attractive, something we haven’t seen in a long time.

This article was written by Frank Roche. Frank is president of Roche Realty Group with offices in Meredith and Laconia, NH, and can be reached at (603) 279-7046. Data was compiled by a NEREN  search on 08/24/2023 and is subject to change. Please feel free to visit www.rocherealty.com to learn more about the Lakes Region and its real estate market.

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