The Census Bureau released the monthly New Home Sales report today, showing a decrease from 719k in September (revised down from 759k initially reported) to 679k in October. While this number is below the long term trend that emerged after the Great Financial Crisis, it’s still in league with the pre-covid highs.
The post-covid story for the housing market has been one of ever-dwindling inventory and its various effects. One of the most obvious effects of lower EXISTING home inventory is that NEW homes have captured a larger share of the market.
Existing homes have moved lower, almost exclusively from the peak. The divergence from New Home Sales has been especially notable since mid-2022 when rates really began skyrocketing. The following chart shows the percent change in both new and existing sales from the peak.
Perhaps most notable is the price trend during the time when sales were down more than 40%.
An inventory crunch is the only thing that could explain the juxtaposition of a sharp decline in sales and a sharp increase in values, but it’s important to note the 3rd ingredient in play during the highlighted time frame above: incredibly low rates. Prices stopped accelerating almost as soon as rates began to jump.
What’s the takeaway for the housing market? Today’s report doesn’t tell us much. Anything in the 650-750k range is fairly neutral. Additionally, the outlook may be rapidly changing to whatever extent the highest interest rates are behind us. That’s a possibility that will receive more clarity with next week’s economic data, but it will take several months to confirm.
The 30-year fixed mortgage rate this week climbed to 8%, reaching that level for the first time since 2000, according to Mortgage News Daily.
The milestone arrives after months of rate increases. As recently as last April, the 30-year fixed mortgage rate stood below 5%, Mortgage News Daily data shows.
An aggressive series of interest rate hikes by the Federal Reserve since last year has pushed up the 10-year Treasury bond yield, which loosely tracks with long-term mortgage rates.
The Fed has increased interest rates to fight elevated inflation, attempting to slash price hikes by slowing the economy and choking off demand.
While inflation has fallen significantly from a peak of about 9% last summer, price increases remain more than a percentage point higher than the Fed’s inflation target.
The persistence of elevated inflation has prompted the Fed to espouse a policy of holding interest rates at high levels for a prolonged period, which in turn has increased the 10-year Treasury yield and put upward pressure on mortgage rates.
Mortgage rates have increased for five consecutive weeks, according to data released by Freddie Mac last Thursday.
Major housing industry groups voiced “profound concern” about rising mortgage rates in a letter last week that urged the Federal Reserve to stop hiking its benchmark interest rate.
“The speed and magnitude of these [mortgage] rate increases, and resulting dislocation in our industry, is painful and unprecedented,” wrote the real estate groups, among them the National Association of Realtors and the National Association of Home Builders.
High mortgage rates have dramatically slowed the housing market, since homebuyers have balked at the stiff borrowing costs, and home sellers have opted to stay put with mortgages that lock them into comparatively low rates.
Mortgage applications have fallen to their lowest level since 1996, the Mortgage Brokers Association said earlier this month.
Sales of previously owned homes, meanwhile, plummeted more than 15% in August compared to a year ago, according to the National Association of Realtors. The slowdown has coincided with a sharp rise in costs for potential homebuyers.
When the Fed initiated the rise in bond yields with its first rate hike of the current series, in March of 2022, the average 30-year fixed mortgage rate stood at just 4.42%, Mortgage News Daily data shows.
Each percentage point increase in a mortgage rate can add thousands or even tens of thousands in additional costs each year, depending on the price of the house, according to Rocket Mortgage.
Speaking at a press conference in Washington, D.C., last month, Fed Chair Jerome Powell acknowledged the continued effect on mortgages of rising interest rates, noting then that activity in the housing market “remains well below levels of a year ago, largely reflecting higher mortgage rates.”
The Fed expects to raise rates one more time this year, according to projections released last month. The central bank plans to make its next rate-hike decision in early November.
Average mortgage rates came down on all loan terms from a week ago, according to rate data compiled by Bankrate. Rates for 30-year fixed, 15-year fixed, 5/1 ARMs and jumbo loans all dropped.
The average rate on the popular 30-year fixed-rate loan at times exceeded 8 percent in recent weeks, following a jump in 10-year Treasury yields. After a period of record lows, mortgage rates climbed in 2022 as inflation spiked and the Federal Reserve responded aggressively. The Fed last hiked its key interest rate in July, which brought up borrowing costs on a variety of financial products, including mortgages.
The central bank held firm on another rate hike this month, indicating it expects rates to stay on the higher side for the foreseeable future.
“To have the full effect of keeping interest rates higher for longer, the Fed will maintain a posture that rates could go higher and that any rate cuts are quite a ways off,” says Greg McBride, CFA, Bankrate chief financial analyst.
The rise in mortgage rates comes alongside appreciating home prices, both of which have kept homebuyers on the sidelines. More than half of home purchase mortgages originated in July had a monthly payment over $2,000, according to Black Knight. Twenty-three percent of originations in July had a payment over $3,000. The affordability squeeze is stretching budgets, and keeping many first-time homebuyers out of the market altogether.
Rates as of November 9, 2023.
The rates listed above are Bankrate’s overnight average rates and are based on the assumptions shown here. Actual rates available on-site may vary. This story has been reviewed by Suzanne De Vita. All rate data accurate as of Thursday, November 9th, 2023 at 7:30 a.m.
30-year mortgage declines, -0.19%
Today’s average 30-year fixed-mortgage rate is 7.83 percent, down 19 basis points from a week ago. This time a month ago, the average rate on a 30-year fixed mortgage was higher, at 7.89 percent.
At the current average rate, you’ll pay a combined $721.95 per month in principal and interest for every $100,000 you borrow. That’s down $13.21 from what it would have been last week.
Use the loan widgets on this page or head to our primary rates page to see what kind of rates are available in your situation. You just need to give us a little information about your finances and where you live. With that data, Bankrate can show you real-time estimates of mortgages available to you from a number of providers.
15-year mortgage rate retreats, -0.08%
The average 15-year fixed-mortgage rate is 7.12 percent, down 8 basis points since the same time last week.
Monthly payments on a 15-year fixed mortgage at that rate will cost roughly $906 per $100,000 borrowed. That may squeeze your monthly budget than a 30-year mortgage would, but it comes with some big advantages: You’ll come out several thousand dollars ahead over the life of the loan in total interest paid and build equity much more rapidly.
5/1 adjustable rate mortgage declines, -0.14%
The average rate on a 5/1 ARM is 6.97 percent, ticking down 14 basis points over the last week.
Adjustable-rate mortgages, or ARMs, are mortgage loans that come with a floating interest rate. To put it another way, the interest rate will change at regular intervals, unlike fixed-rate mortgages. These loan types are best for people who expect to refinance or sell before the first or second adjustment. Rates could be materially higher when the loan first adjusts, and thereafter.
While borrowers shunned ARMs during the pandemic days of super-low rates, this type of loan has made a comeback as mortgage rates have risen.
Monthly payments on a 5/1 ARM at 6.97 percent would cost about $663 for each $100,000 borrowed over the initial five years, but could increase by hundreds of dollars afterward, depending on the loan’s terms.
Jumbo mortgage rate declines, -0.17%
The average rate for the benchmark jumbo mortgage is 7.83 percent, down 17 basis points from a week ago. This time a month ago, the average rate for jumbo mortgages was higher, at 7.92 percent.
At the current average rate, you’ll pay $721.95 per month in principal and interest for every $100,000 you borrow. That represents a decline of $11.81 over what it would have been last week.
Interested in refinancing? See rates for home refinance
30-year mortgage refinance trends down, -0.12%
The average 30-year fixed-refinance rate is 7.96 percent, down 12 basis points compared with a week ago. A month ago, the average rate on a 30-year fixed refinance was higher, at 8.08 percent.
At the current average rate, you’ll pay $730.98 per month in principal and interest for every $100,000 you borrow. That’s a decline of $8.37 from last week.
Where are mortgage rates heading?
Most rate watchers polled by Bankrate predict mortgage rates will rise this upcoming week. Looking to the remainder of the year, some forecasters still expect to see rates decrease, but the state of the U.S. economy and rising 10-year Treasury yields will be key factor.
30-year fixed mortgage rates mostly follow the 10-year Treasury yield, which shifts continuously as economic conditions dictate, while the cost of variable-rate home loans mirror the Fed’s moves.
“Economic data that is not too hot and not too cold would be helpful to mortgage rates and could get rates back down below 7 percent,” says Greg McBride, chief financial analyst for Bankrate, adding, “but that has to be true for inflation, job growth, wages and consumer spending.”
What these rates mean for you and your mortgage
While mortgage rates move up and down on a daily basis,, there is some consensus that we won’t see rates return to 3 percent for some time. If you’re shopping for a mortgage now, it might be wise to lock your rate when you find an affordable loan. If your house-hunt is taking longer than expected, revisit your budget so you’ll know exactly how much house you can afford at prevailing market rates.
You could save serious money on interest by getting at least three loan offers, according to Freddie Mac research. You don’t have to stick with your bank or credit union, either. There are many types of mortgage lenders, including online-only and local, smaller shops.
“All too often, some [homebuyers] take the path of least resistance when seeking a mortgage, in part because the process of buying a home can be stressful, complicated and time-consuming,” says Mark Hamrick, senior economic analyst for Bankrate. “But when we’re talking about the potential of saving a lot of money, seeking the best deal on a mortgage has an excellent return on investment. Why leave that money on the table when all it takes is a bit more effort to shop around for the best rate, or lowest cost, on a mortgage?”
More on current mortgage rates
Methodology
Bankrate displays two sets of rate averages that are produced from two surveys we conduct: one daily (“overnight averages”) and the other weekly (“Bankrate Monitor averages”).
The rates on this page represent our overnight averages. For these averages, APRs and rates are based on no existing relationship or automatic payments.
Learn more about Bankrate’s rate averages, editorial guidelines and how we make money.
Did you know that for the median sale price in Spokane on a 30-year fixed-rate loan will cost buyers more than one million dollars?
SPOKANE, Wash. — Interest rates, home prices, and a lack of inventory are some of the reasons lenders said are why fewer people are applying for home loans in the last year. This means, for the median sale price in Spokane on a 30-year fixed-rate loan will cost buyers more than one million dollars.
A new snapshot report from the Spokane Association of Realtors shows inventory of homes on the market was up 2% in the month of September, despite the small increase, there is still not enough supply.
“There’s not enough homes on the market right now, to be able to drive down the prices,” said Troy Clute, Senior Vice President of Numerica’s Home Loan Center.
Clute said climbing interest rates are causing a trickle down effect, potential sellers who don’t want to let go of their low rates and buyers waiting for more options to open up.
“So a lot of people are on the sidelines, and they’re just going to wait until rates start to come down before they put their house on the market. So that continues to keep inventory at a low,” Clute said.
If interest rates are causing sellers and buyers to holdout, the question is, are rates today really out of the ordinary? Rocket Mortgage has tracked interest rates since the early 70’s.
You may be surprised to learn rates in the past have been much higher.
In the early 80’s interest rates nearly reached 13%, then through the early 2000’s interest rates actually hovered between 8-9%.
It wasn’t until the 2010’s when interest rates drop to 5% and then to, as low as 3% in the early 2020’s.
We have a whole generation now of people that that’s all they know, because it’s been a couple of decades. And these people entering the market right now are not conditioned to, to those types of rates. And neither is the market,” said Jennifer Hentges, SNAP Housing Counseling Program Manager.
It’s this shock, Hentges hears from people coming into SNAP for help buying a home.
“We have a lot of people coming in to the home buyer education courses, and they’re all enthusiastic. And when they start learning what it’s going to take, they get discouraged.”
The U.S. Census Bureau reports the average household income in Spokane is about $64,000.
For those looking to buy a home with that income Hentges said people will not be approved for the median home price.
“That income will buy you probably somewhere between 250 and maybe not even $300,000 house,” Hentges said.
This is the challenge for home buyers, the Spokane Association of Realtors report the median home price as of September was $409,000.
“The house payment for that amount at today’s rates is about $3,335, which is a huge payment,” Hentges said.
Hentges said this means a household needs to make about $115,000 to afford a home. However, it’s not just the monthly payment, over the life of the loan people will pay a lot more in interest.
The median home price in Spokane in September of 2020 was $315,000. The interest rate then was 2.93% for a 30-year fixed-rate loan.
This means over the life of the loan someone would pay about $474,000 with a monthly payment of about $1,300.
Today the median home price in Spokane is about $410,000. The interest rate is about 8.6% for a 30-year fixed-rate loan. A large portion is interest and the monthly payment more than doubled from 3 years ago, now more than $3,000 per month.
This is the number that may surprise you, at today’s interest rates you’ll pay more than one million dollars over the life of the loan.
“That’s not to say they can’t refinance. But it does make a very big difference in what they can expect to pay over the life of the loan,” Hentges said.
Lenders say you shouldn’t bank on it, and expect to pay the rate you receive for a while. The good news, homes in this market continue to appreciate in value.
“So I think getting in right now and buying a home. Even with a higher interest rate, you have the option of refinancing later,” Clute suggested.
SNAP offers home buyer education courses to help people navigate the process and connect them to down payment assistance programs.
“It’s amazing to watch people get a home when they didn’t think they were going to have a home, save their home from foreclosure when they thought there was no hope,” Hentges said.
Lenders said the days of 3% interest are behind us, it could be a while before we see rates like that again, if ever.
Their best advice to home buyers, ask for help from a loan counselor and make the move when the numbers make sense for your budget.
Watch the full interview with Troy Clute, Senior VP of Numerica Home Loan Center
Mortgage Rates Surge Lower After Fed Announcement, But Not Necessarily Because of It
Today was “Fed day” and mortgage rates fell quite a bit. So it must have been due to the Fed announcement, right?
Not exactly…
The Fed helped, but more so by getting out of the way for a bond market that was already rallying. Let’s talk about what all that means.
“Fed day” means that today was one of 8 scheduled announcements by the Fed regarding monetary policy. At the simplest level, this just means they’ll announce a change or no change in the Fed Funds Rate. The market didn’t expect a change today and it didn’t get one.
Beyond the rate announcement, there’s also a press conference with Fed Chair Powell where the market can glean clues about future Fed moves. Little changed there and Powell didn’t say anything materially different than his last public appearance. Perhaps traders were concerned that some of the recent data would have the Fed thinking more about hiking short term rates and the positive reaction was akin to a sigh of relief.
Even then, it wasn’t really the Fed reaction that helped rates the most. Mortgage rates improve when bonds rally and bonds rallied most sharply in the AM hours after a series of economic reports. The data was either in line with expectations or weaker, and low rates love weak data.
There was also a more detailed update from Treasury regarding auction amounts. Treasury auctions determine the “supply” of a Treasury securities, and that supply has a critical impact on interest rate momentum. It’s a bigger deal for Treasuries than for the bonds that dictate mortgage rates, but the two are very closely correlated.
Even before the Fed announcement, the average mortgage lender was already an eighth of a point lower than yesterday. That’s a big move for a single day. As bonds continued to improve after the Fed, many lenders issued mid-day reprices, bringing the average down 0.19% from yesterday.
From here, it will be Friday’s jobs report more than anything else that has the power to add momentum to this move or to push back against it. It all depends on whether it continues showing excess strength in the labor market or signs of deterioration.
Amged Baker, a 40-year-old software developer, wanted to move to a bigger home as the Florida native transitioned into a new role at work that allowed him to be permanently remote. He also wanted more space for his two kids.
But Baker, who works for a real-estate platform, knew that it wasn’t that simple to trade up. Mortgage rates had doubled and home prices continued to rise. In his hometown of Palm Beach County, Fla., home prices soared by nearly 60% over the last five years.
He sold his previous home for $600,000, which had a 30-year mortgage rate of 2.8%. However, he was prepared to give up that rate if he could avoid paying a rate of 7%.
Baker was intrigued byassumable loans. Having refinanced his current home during the pandemic, he was keenly aware of the value of his ultra-low mortgage. He knew his monthly payments would be a lot more affordable with an assumable mortgage — and so his search began.
He’s not alone. It appears to be the housing market’s latest obsession — homeowners, buyers, and real-estate agents are all talking about assumable mortgages.
Across real-estate brokerage sites, listings boast that the home comes with an “assumable mortgage,” described in glowing terms as a “rare find,” “game-changer,” or as one buyer said on social media, “white whale.”
What are assumable mortgages?
With assumable mortgages, the loan — and, importantly, its interest rate — is passed from the seller to the buyer when a house changes hands.
With the U.S. housing market frozen by high rates and low inventory, it’s clear why people have turned their attention to assumable loans. They’re particularly appealing now because they offer homeowners a way to potentially capitalize on their pandemic-era ultra-low mortgage rate by passing it on.
Here’s the catch: Only certain types of loans can be assumable mortgages. The seller must have a government-backed home loan, which is insured by the Federal Housing Administration, Veterans Affairs, or certain loans by the U.S. Department of Agriculture.
“‘Folks don’t want to give up those assumable mortgages because they’re just as attractive to them as they are to you.’”
— Andy Walden, vice president of enterprise research strategy at ICE
These government agencies allow homeowners to transfer ownership of the mortgage to a new home buyer under certain conditions such as the new buyer having good credit, an acceptable debt-to-income ratio, and more.
For the typical home buyer today who is facing a 30-year mortgage with a rate over 7%, assuming an existing mortgage with an interest rate as low as 1.75% is an enticing proposition. It offers an alternative to buying points — fees a borrower pays the lender to cut the mortgage rate on their home loan — or taking out an adjustable-rate mortgage, which comes with its own risks.
For the seller, an assumable mortgage presents another feature to play up when listing their home. There is also, perhaps, some comfort in knowing that their ultra-low interest rate will be inherited by the buyer.
Assumable mortgages were popular in the 1980s
“For the last 40 years, rates have been falling, so nobody cared about assumability,” said Tod Tozer, former president and CEO of Ginnie Mae. “So we’re basically back to the future — we’re back to 40 years ago when 30-year mortgages were close to 13%, 14% back in 1981. And they’ve been falling ever since.”
Ginnie Mae securitizes all FHA, VA, and USDA mortgages for the secondary market. Tozer has also written about assumable mortgages being a “solution” to today’s frozen housing market, as the seller will be able to “receive top dollar for the sale of their home,” and move to another place.
Assumable mortgages were popular in the 1980s when mortgage rates were in the double digits. Back then, many conventional loans were assumable. “It was the standard of the industry,” Tozer said.
But assumable mortgages aren’t as common as a conventional loan, making them hard to come by.
Based on the market today, only 12 million mortgages are potentiallyassumable, which is less than a quarter of all mortgages in the U.S., according to loan-level data from ICE. Of these mortgages, which are primarily FHA, VA, and USDA loans, about 7.2 million or 14% have a mortgage rate of below 4%.
Assumable mortgages can be difficult to find, and it can also be difficult to get homeowners to part with their loan if the alternative is to buy a house with a much higher interest rate.
“Folks don’t want to give up those assumable mortgages because they’re just as attractive to them as they are to you,” said Andy Walden, vice president of enterprise research strategy at ICE, or Intercontinental Exchange, a data company.
Additionally, even after a buyer takes over the mortgage, they will still need to cover the difference between the outstanding balance and the sale price, Walden told MarketWatch.
How assumable mortgages work
So how do they work? Imagine an aspiring homeowner views a home valued at $375,000, and the home comes with an assumable mortgage of $225,000. The buyer in this situation will need to put down $150,000 in cash, or find other financing after they assume the mortgage.
If the buyer requires secondary financing, it will likely come at a higher interest rate, which will offset some of the savings from the assumable mortgage. Nonetheless, for homeowners who are keen on selling, if they have an assumable mortgage, their house will become more attractive to buyers.
“Veterans across the country are sitting on these ultra-low rates,” Chris Birk, vice president of mortgage insight at Veterans United Home Loans, told MarketWatch. “So they’ve got this incredible marketing opportunity.”
“‘Veterans across the country are sitting on these ultra-low rates. So they’ve got this incredible marketing opportunity.’”
— Chris Birk, Veterans United Home Loans
And yet of the 69,000 VA purchase loans that his company processed in 2022, only about two dozen were assumptions.
There’s a lack of awareness about assumable loans, Jason Mitchell, chief executive of Jason Mitchell Group, a Scottsdale, Ariz.-based real-estate brokerage, told MarketWatch.
The first question real-estate agents should ask homeowners who are listing their homes is whether their mortgage is assumable. “If you can mark it as an assumable mortgage at 3.5%, you’re gonna get a better price on your house,” he added.
What happens if the new buyer defaults on the assumable mortgage?
The person who assumes the mortgage also becomes responsible for paying the loan on time. If the new buyer stops making their mortgage payments and goes into default, that does not mean the original owner will be required to pay up.
With FHA loans, “once the assumption is complete, it is a full release of liability for the previous borrower, which means the new borrower (the borrower that has assumed the mortgage) has full responsibility for all aspects of the mortgage,” a HUD spokesperson told MarketWatch.
Similarly, with VA loans, when another buyer assumes the mortgage, there is a release of liability, Birk added. The veteran who owned the home previously isn’t financially responsible if the new owner defaults.
One man’s search for an assumable mortgage
During his search, Baker, the software developer, contacted Chris Tapia, a 41-year-old real-estate broker with Compass Florida. Tapia had met Baker three years ago when the homeowner bought his first home in Palm Beach, and the pair had become good friends.
Tapia had recently introduced the idea of assumable mortgages to Baker. The agent believed that it was one key way for home buyers to take back the purchasing power they lost as homeownership became more expensive.
“Everything is so phenomenally expensive that no one can really afford anything right now,” Tapia told marketWatch.
In his quest for assumable loans, Baker specifically looked for homes that were financed with a mortgage from the Federal Housing Administration, Veterans Affairs, or the U.S. Department of Agriculture.
He then searched home listings from various online brokerages to identify those that were financed with an FHA or a VA mortgage. He also looked at services such as FHA Pros, a site that provides real-time data for FHA and VA condominium approvals.
But homeowners can also look for listings with assumable loans via Google with the following search term: site:compass.com “assumable.”
MarketWatch found several new and old listings advertising assumable mortgages in the home’s description.
Finding an assumable rate of 3.05%
Baker and Tapia attended 20 open houses in Palm Beach County.
They made four offers and ultimately closed on a four-bedroom single-family home in Palm Beach County for $620,000. Baker took over the seller’s 30-year fixed-rate mortgage, under the assumption rules.It has a 3.05% rate.
He currently holds a Federal Housing Administration loan with an outstanding balance of $324,000. As a result, he put down $269,000 in cash.
The seller had only paid off about 3 years on their 30-year loan,so Baker took it over with a monthly payment of about $1,500. He estimated that buying the home with a conventional mortgage at the prevailing rate would cost closer to $2,300 a month.
Baker closed on the home in June 2023, and because he assumed the seller’s loan he did not have to pay thousands of dollars in closing costs.
“You will be hearing about assumable loans more often,” Tapia, the broker, said.
Baker agreed. “To be honest with you, it was always a good deal — it was always better than going the conventional route,” he said.
The US housing market looks like it’s headed for a recession, Wells Fargo has said.
Mortgages spiking to nearly 8% would cause homebuying to plummet, the bank says.
Strategists compared the situation to the 1980s when interest-rate hikes put pressure on the property market.
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research note last week.
“Although mortgage rates may gradually descend once the Federal Reserve begins to ease monetary policy, financing costs are likely to remain elevated relative to recent norms,” they added. “A ‘higher for longer’ interest rate environment would likely not only weigh on demand, but could also constrain supply by reducing new construction and discouraging prospective sellers carrying low mortgage rates from listing their homes for sale.”
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The average 30-year fixed-rate mortgage has climbed from under 4% to just shy of 8% since the Fed started tightening in March 2022, data from Freddie Mac shows.
Higher borrowing costs have driven a decline in the construction of new US houses, further tightening a supply-starved market and encouraging many existing homeowners to stay put to cling to historically low rates they’d previously locked in. Just 1% of Americans sold their houses during the first half of 2023, data from Redfin showed.
In the 1980s, the Fed’s aggressive war on inflation drove 30-year mortgage rates as high as 19% — prompting homebuilders in Jackson, Mississippi, to send the central bank’s chair, Paul Volcker, lumber with the inscription: “Help! Help! We Need You. Please Lower Interest Rates.”
The Wells Fargo economists compared that desperate plea to a letter that the National Association of Realtors, Mortgage Bankers Association, and National Association of Homebuilders sent the Fed’s board of governors earlier this month. The three groups called the chair, Jerome Powell, to make clear that he was calling time on the bank’s current rate-hiking campaign.
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“The plea for assistance from housing industry participants, both in the early 1980s and more recently, illustrates the severe impact higher interest rates can have on the residential sector,” Dougherty and Barley wrote.
“After perking up at the start of year, nearly every facet of housing activity has shown signs of relapse as the Fed has maintained a restrictive policy stance and mortgage rates have breached 7%,” they added, referring to the fact that home sales, mortgage applications, and indices tracking homebuilder confidence have all declined in recent months.
You’ve probably heard of the mortgage rate lock-in effect, where homeowners are unwilling (or unable) to give up their ultra-low mortgage rates.
Also known as golden handcuffs, these low rates have arguably prevented many existing homeowners from moving, and certainly from refinancing.
But now one bank may hold the key to unlocking some of these borrowers with their so-called “split-the-difference” mortgage rate program.
As the name suggests, they’ll give you a mortgage rate in between your old rate and prevailing market rates if you apply for a new home loan.
This could lessen the blow of moving at a time when home prices remain near all-time highs and mortgage rates also hover close to 21st century highs.
Would You Be Willing to Move If Mortgage Rates Were a Little Bit Lower?
Glenville, New York-based TrustCo Bank has come up with a novel concept to get homeowners moving again, literally.
They’re offering below-market mortgage rates to existing home loan customers when they move into a new home.
The catch is that they have to pay off their old home loan, which likely carries a significantly lower interest rate.
The idea here is that the bank can get rid of a low-yielding mortgage while simultaneously giving their customer a more palatable mortgage rate in an 8% mortgage rate world.
It’s arguably a win-win situation for both bank and borrower, assuming the homeowner wants to move elsewhere.
The program works for TrustCo Bank because they’re a portfolio lender, meaning the loans they underwrite stay on their books after closing.
This contrasts the many nonbank lenders out there that originate loans and quickly sell them off to third-party investors.
And as you might suspect, banks holding billions in super-low-rate mortgages likely want to get rid of them as quickly as they can, as opposed to holding them to term.
So if they can give homeowners a little nudge, it could solve any duration mismatch the bank might be dealing with, where they’re lending cheap while bond yields skyrocket.
How the Split the Difference Mortgage Rate Program Works
As noted, you have to be an existing TrustCo Bank mortgage customer who is purchasing a new owner-occupied home to live in.
Let’s pretend you received your home loan from the bank a couple years ago when the 30-year fixed was averaging 3%.
You love your low rate, but you aren’t thrilled about your property. Or you simply want to move for one reason to another.
Enter the “Split-the-Difference” program, which considers your current rate, today’s rates, and gives you something in the middle.
To calculate this rate, first they subtract your rate (e.g. 3%) from prevailing market rates. We’ll call that rate 7.50%.
That gives us a difference of 4.50%, which is then divided by two to determine the split figure amount, or 2.25%.
This number is then added to your existing mortgage rate (3% + 2.25%) to come up with a split-the-difference rate of 5.25%.
If the rate happens to be an odd amount, it will be rounded to the nearest quarter percent. Unclear if that’s rounded both up and down though.
Regardless, as you can see a mortgage rate of 5.25% would be significantly better than a rate of 7.50%.
Is This a Good Deal for Existing Homeowners?
$500k Loan Amount
Standard Rate
Split-the-Difference
Interest Rate
7.50%
5.25%
Monthly Payment
$3,496.07
$2,761.02
Monthly Savings
n/a
$735
Savings @ 60 months
n/a
$44,000
Balance @ 60 months
$473,087.41
$460,747.39
On a mortgage with a $500,000 loan amount, we’d be talking about monthly savings of roughly $735.
Over a five-year period, that’s $44,000, and it would result in a lower outstanding balance due to the reduced interest expense.
Of course, you’d be giving up your old 3% mortgage in the process. But if you truly wanted/needed to move, it could be a favorable option versus other alternatives.
Still, you need to shop around to see what other banks could offer and you’d need to take a look at the closing costs involved.
One could also look into an adjustable-rate mortgage, assuming rates were similar/better and the closing costs lower.
But if you’re already a TrustCo mortgage customer, it’d be at least worth entertaining a rate quote to determine the potential savings.
As noted, they’re a portfolio lender that keeps the loans its originates. Don’t expect your average bank or mortgage lender to offer the same program.
Most mortgage companies don’t service their own loans, and thus do not have an interest in getting the old loan paid off ahead of schedule.
You’ve got to hand it to TrustCo though for getting creative at a time when mortgages have become a tough sell.
The bank primarily operates in the states of New York and Florida, with each state accounting for about half of total home loan production.
They funded nearly $1 billion in home loans last year, per HMDA data.
Over the past month or two, in certain markets across the United States, bidding wars have been heating up as mortgage rates continue to march lower.
The steady drop in rates has effectively stopped the bleeding in home price declines, while simultaneously making homeownership more affordable.
[You may have missed the housing bottom…]
As a result, buyers are turning up in droves to snap up properties on the cheap, often just days after they’re listed.
While this is great for those looking to sell, and perhaps even better for the economy as a whole, it’s also making it a lot tougher to snag a desirable property.
Buyers Fighting for Properties
For those who want to “get in the game,” it’s becoming increasingly difficult, despite the fact that it’s pretty darn easy to qualify for a mortgage, assuming you’ve got decent income, assets, and credit.
Sure, it’s not 2008, but it’s still easier to get more house for your buck thanks to those low rates.
But here’s the problem. Because people actually want to buy houses again, there’s lots of competition.
And since banks are a bit more fickle about dishing out mortgages, sellers are often favoring those paying with cash or putting lots of money down.
In other words, your bulletproof offer with 20% down may not be enough these days.
To beat the competition, you may have to up your asking price in a hurry, effectively paying above-market, or come in with a lot more down.
How did the ultimate buyer’s market turn into a seller’s market overnight?
20% Down is Hard Enough
Many housing proponents have already argued that putting down 20% is too difficult for most prospective buyers, so bringing in more cash at closing is probably out of the question for most.
That said, housing may not be as accessible as it may seem, which creates a bit of a catch-22.
And the last thing homeowners want to do in an uncertain market is pay more for a property than it’s actually worth.
So it looks like real estate investors are making out like bandits in the current market, while first-time homebuyers and those with little set aside are facing new problems.
For the record, if you’re thinking about going with an FHA loan, the task becomes even more trying.
Many homes and condos aren’t even eligible for FHA financing, so many borrowers who think they’ll qualify with a mere 3.5% down may be in for a rude awakening.
This could push impatient buyers into making bad decisions, often chasing the properties no one else wants, merely because their seemingly decent offer will only be accepted when no one else is biting.
There’s been a lot of interesting housing-related news over the past week, with some good and some bad.
The first bit is that economists finally believe the national housing bottom is near.
Yes, we’ve heard that before, several times, but per Zillow, the economists surveyed are all “largely” on-board this time.
So that’s good news. The bad news is that more than half of the same respondents believe the homeownership rate will continue to fall from the 65.4% level seen in the first quarter.
In fact, one in five think homeownership will be at or below 63% in coming years, which will test the all-time low established in 1965.
For the record, some areas of the nation have already appeared to bottom, and are actually up quite a bit.
In hard-hit Phoenix, home prices are already up 12% from their bottom. In San Francisco, prices are up 10% from bottom.
But New York, Atlanta, and Chicago are still waiting for the bounce.
Housing Recovery Not Looking Too Hot
Meanwhile, future home appreciation isn’t looking as good as it once was.
Back in June 2010, Zillow-surveyed economists expected cumulative appreciation of 10.3% from 2012 to 2014.
Now, the experts only see home prices appreciating a paltry 3.5% for the same period.
That’s $1.25 trillion less in housing wealth than previously expected. Yikes.
So expect an “L” shaped recovery…in other words, a steep decline, followed by many, many flat years. Sure, it may a be “squiggly L” with little ups and downs, but an “L” nonetheless.
That said, make sure you actually like the place you buy, don’t just buy it because you think you’re going to make a killing off it as an investment.
The good news is mortgage rates continue to be absurdly low, with the 30-year fixed matching a record low 3.48% this week, per Zillow.
I didn’t see rates falling that low, so I’ll start eating my hat now.
But I still think the low rates could be a major artificial stimulus, which has led to homeowners listing the worst properties out there of late.
Why the Housing Recovery Will Take Time
If you’re wondering why the housing market won’t bounce back immediately, you merely need to consider all the ineligible buyers.
Let’s start with the millions of underwater homeowners, who won’t be able to move unless they’re rich enough to buy a new house and short sell or bail on their current property.
There aren’t many people this lucky, especially now that lenders actually document income.
Then there are those who still haven’t gone through foreclosure yet, but are hanging on by a thread.
There are plenty who still haven’t been displaced, but will be in the next several years. So there’s a ton of shadowy shadow inventory yet to materialize.
Even those who received loan modifications are in serious trouble. A recent study released by credit bureau TransUnion found that a scary 60% of those who received loan mods re-defaulted just 18 months later.
So there’s a lot of bad news that just isn’t making it to the presses, largely because we are riding the “good news train” right now in the housing world.
All of these former homeowners will also have difficulty qualifying for a mortgage in the future, so they’re essentially out of the mix.
Let’s not forget the millions that are unemployed…they obviously won’t be able to buy a home either, so this explains the dip in homeownership as well.
And it doesn’t bode well for home prices going forward. Consider that as home prices rise, more would-be home sellers will list their properties. This should keep downward pressure on prices for a long time.
It also makes one question if the bottom is really as close as some think, or even for real. We saw misleading upticks with the homebuyer tax credit too, so it’ll be interesting to see if this latest rally has legs.