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  • Michelle Plunkett

2023 Expectations - A Trade-Off for Buyers With Preserved Seller Strength

In January 2022, we encouraged buyers to “stay strong” in a red hot market. At that time, we were expecting mortgage rates to increase during the year. Indeed, according to Freddie Mac, the average 30-year weekly mortgage rates jumped from 3.22% in January 2022 to a high of 7.08% at the end of October 2022.

The all-time low of 2.65% in January 2021 was a result of the pandemic and will likely not be seen again in our lifetimes. Buyers that were unable to capitalize on the low rates before the Spring of 2022, may have more opportunities than they realize today.

While mortgage rates increased throughout 2022, they have come down off of their highs. And, the 30-year fixed rates are still below the 7.76% average rates experienced between April 1971 and December 2022 as tracked by Freddie Mac. Mortgage rates are constantly in flux and many of you may remember much higher mortgage rates than we see today and yet, many buyers were happy to buy homes at those rates.

What has changed?

1) Today’s home prices are much higher than those days; and

2) Buyer’s fear that as the Federal Reserve continues to combat inflation, fed funds rates will likely keep increasing during the buyer’s home search process.

Home Prices:

It’s true that home prices have grown significantly since the Great Recession tapered off in 2011. However, take heart that we are now seeing some corrections in the market due to a dip in demand in some market segments. At the very least, prices are not increasing at an astronomical pace as they were during the previous frenzied market.

Here lies the trade-off for buyers: While mortgage rates have climbed, the decrease in buyer demand results in increased buyer leverage during the home purchasing process providing better purchase prices and reasonable repair concessions from the seller. Buyers may also be able to buy their new home contingent on the sale of their current home which seemed impossible in the previously overly competitive market. These are permanent benefits enjoyed over the period of ownership while higher rates are more temporary as they can be refinanced later after inflation comes under control and rates drop.

Rising Fed Fund Rates:

But, will rates keep going up? Note that raising the fed funds rate does not automatically result in higher mortgage interest rates. An increase in the fed funds rate is an increase in short term rates, while mortgages are based on long term rates. In fact, mortgage rates closely follow the 10-year treasury note which has been trending down since it peaked last October indicating an anticipation that the Fed will stop raising rates in the months ahead and eventually cut those short term rates.

With creative financing products, buyers can afford their mortgages while waiting for rates to come down. For example, an interest only product for 5, 7, or 10 years provides lower monthly payments and allows the buyer to refinance once the rates come down, in about 18 to 24 months. Or, buyers can take advantage of a rate buy-down product. See our November 2022 Blog Post for more on these options.

Words of caution for both buyers and sellers:

Buyers: Do not expect that your low-ball offers will now be successful since, even though demand is weaker, there are still less homes available than needed resulting in preserved seller strength in the market.

Sellers: In this new market of less demand, proper pricing has become crucial to the successful sale of your home. Due to the continued low inventory, home values continue to be supported and prices have not substantially fallen. However, the craziness of the previous market has subsided and you need to appropriately price your home when you go to the market in order to attract the right, qualified buyer in a reasonable amount of time.

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