A very interesting article appeared in the Detroit News last week: Likelihood of a pricier mortgage discourages people from selling. The article was about a new phenomenon that is affecting the mortgage and real estate industries. People who bought a home or refinanced in the last few years have such a ridiculously low mortgage rate that they don’t want to move and have to accept a new mortgage with a higher rate.
The article points out that this is a big change from anything we’ve seen in the last 30 years. There hasn’t been a time, until now, where a consumer would trade up to a better home and not enjoy a lower mortgage rate. More than 1/3 of mortgages in the U.S. today have a rate below 4%, according to real estate data provider CoreLogic. If those people move and get a new mortgage, they will absolutely get a higher rate than they currently have. But is waiting out the slight rise in rates a good decision?
Waiting for a New Home Could Be Costly
Here’s why this trend in consumer behavior may not be in your best interest. Waiting will most likely result in even higher mortgage rates and home prices. So even though you might be getting a mortgage today with a higher rate than you got last year or the year before, the longer you wait, the higher your rate will likely be.
Let’s face it: The Federal Reserve has cut back its quantitative easing program, which has kept rates in the dungeon since 2011. The Fed was buying mortgage-backed bonds in an effort to keep rates low, and the plan worked. Rates hit all-time lows in 2012 but started creeping back up early last year. But the quantitative easing couldn’t last forever. At some point, the free market needs to take over and let rates settle where they will – and that’s probably about a percent higher than what we have today.
Economist Bill Conerly predicted in an article in Forbes that the 10-year Treasury rate could go as high as 3.5% by the end of 2014 (though it’s more likely to be closer to 3%). That’s important because 30-year fixed rates tend to trend about 2% higher than the 10-year Treasury rate. If the 10-year rate hits 3.5%, we might see 30-year fixed rates around 5.5%. This isn’t a guarantee, but historically, the 30-year fixed rate is just about 2% higher than the 10-Year Treasury rate.
Plus, housing values are rising (though very slightly according to Case/Schiller) in almost all markets across the country. Home prices are now back to the levels we saw in the summer of 2004, but they’re still about 17–18% lower than they were during the peak of 2006. This means that now is a great time to take advantage of the market before prices do climb higher.
It really is just a matter of time. Again, nobody has a crystal ball, but all indicators are that mortgage rates are going to rise and home prices are going rise. If you want to move, don’t wait.
Do you have any plans to move in the near future? We’d love to hear your take on whether this is a good time to move or stay in your current home.