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The housing market is continuing to run hot with fewer signs of a significant slowing, like it historically does in the fall. Home prices have hit double-digit increases this year. And with the low mortgage rates expected to edge up in the fourth quarter, many home shoppers are wondering whether they can find something affordable in the coming months.
We spoke with housing experts and economists about where the market is headed, after home prices jumped more than 18% annually in August, the highest 12-month gain in the 45-year history of CoreLogic’s index. The Mortgage Bankers Association (MBA) also recently reported that the average mortgage amount to buy a home was $410,000 in July, the highest amount since May and a 19% jump from a year earlier.
Experts largely agree that while there will still be areas with affordable housing, you might have to look a little farther, and wait a bit longer, to find a dream home within your means.
If you’re considering buying a home anytime soon, here are the four main price-determining forces and what experts say they will look like in the coming months:
Expect Mortgage Rates to Edge Up
Borrowers have enjoyed a long streak of ultra-low mortgage rates since April 2020. The 30-year, fixed-mortgage rate has remained very low after the Federal Reserve began buying mortgage-backed securities almost immediately once Covid-19 hit the U.S. But that streak may be coming to an end as rates are headed northward, economists say.
- Lawrence Yun, chief economist for the National Association of Realtors (NAR), forecasts rates to hit 3.3% by the end of 2021, and between 3.5% to 3.7% by the end of 2022.
- Ali Wolf, chief economist for Zonda, a homebuilding prop tech company, predicts rates will hit at 3.2% by year end.
The average interest rate on a 30-year mortgage was 3.14% for the week ending Oct. 1, according to the MBA. Although a few percentage points higher might not seem like a lot, the extra cost can add up. Higher interest rates also erode your buying power, so as rates rise, what you can afford decreases.
Related: Compare Current Mortgage Rates
However, rates have been so low that even a few percentage points more is still not as high as the rates were in 2019, which historically speaking, is still very low. Here are three scenarios that show how much more you would pay on a 30-year mortgage if just the interest rate rises, based on Forbes Advisor’s mortgage calculator.
The biggest influences on today’s mortgage rates include inflation, the Fed’s monetary policy and what happens with Treasury bonds.
“Mortgage lenders are likely to face pressure to raise interest rates over the next few months if recent inflation measures keep rising,” says Todd Teta, chief product officer at Attom Data Solutions. “The latest figures show that inflation is running at 4.1% nationally, or more than double what it’s been for most of the past decade. Since mortgage rates generally rise or fall with inflation, higher mortgage rates seem likely at this point, unless inflation falls back.”
Along with rising inflation, the Fed is also expected to pump the brakes on its aggressive monetary policy by year end as it tapers spending on securities and bonds. So far, the Fed has spent around $4 trillion on bond purchases, which has helped keep the markets liquid and lenders confidently extending new mortgages with low rates. But as the economy stabilizes, the Fed will likely begin to reduce its bond buying, which will push rates up.
The third important component is the yield on the 10-year Treasury bond, which tends to move in unison with mortgage rates.
“When global investors sense increased uncertainty, there is a flight to safety in U.S. Treasury bonds, which causes their price to go up, and their yield to go down,” says Odeta Kushi, deputy chief economist at First American. “The opposite is true when the economy is improving, as it is now, and as it is widely expected to continue doing through the end of the year.”
Skyrocketing Home Prices Could Taper Off, But Not By Much
Home prices have shot up over the past year, and many experts believe there’s even more room for prices to grow.
Home builders have struggled to keep up this year as buyers from all walks of life have flooded in, including millennials, repeat buyers and investors. Transplants from areas like New York, Los Angeles and Silicon Valley are pricing out locals as many buyers have transitioned to permanent remote work. Part of the movement outward was also due to Covid-19 initially hitting more consolidated major cities.
For example, Bend, Oregon, had the highest year-over-year (YOY) price increase in August at 37.2%, followed closely by Twin Falls, Idaho, with a 35.8% YOY rise. These are two prime examples of cities overtaken by transplants in search of more affordable housing.
Although most forecasters predict steadily rising prices, there’s a consensus that the increase will not be as astronomical as we’ve seen in recent months.
“There will only be a 4% to 5% home price appreciation over the next 12 months,” Yun says.
This estimate is a drop from the 19.7% YOY average home price growth in July, according to the S&P CoreLogic Case-Shiller National Home Price Index, which tracks average home prices in major U.S. metros. July broke a record for the biggest jump in growth.
However, there are still areas that offer affordable homes, they just might have to look farther out.
“Some buyers may have trouble finding homes in bigger cities, so they might have to move to smaller towns, the exurbs or more rural areas,” Yun says.
Related: 10 Most Affordable Cities To Buy A Home
Housing Supply Is Growing
Low inventory has been a major contributor to the housing price increases for both buyers and renters. However, inventory is starting to expand from the record-lows experienced this time last year. Economists often look at the supply of housing in a given month, which tells us how long it would take to deplete the current for-sale inventory at the current sales rate.
In August, September and October of 2020, the months’ housing supply fell to just 3.5 months, the lowest on record. In August of this year, that same ratio hit six months—an indication of a healthy housing supply.
There’s also an uptick in homes under construction. Housing starts, the number of new residential homes that broke ground in a given month, jumped in August to 3.9%, for an annualized rate of 1.62 million homes.
All of this new supply should mean lower home prices, but not necessarily. Prices are still elevated because sellers are likely unwilling to lower their prices after seeing such competitive offers and bidding wars. And there’s still massive buyer demand for single-family homes.
“Even if more inventory comes to market and mortgage rates rise modestly, demand for homes will continue to outpace supply, putting upward pressure on prices,” Kushi says. “Similarly, house prices are ‘downside sticky,’ because sellers typically would rather withdraw from the market than sell at lower prices.”
Signs of Cooling Buyer Demand
Typically, the housing market cools down in the fall and winter, then picks up during the spring and summer. These seasonal trends were obliterated when Covid-19 hit. But there are some early indications that the frantic home buying stories seen earlier this year, similar to the toilet paper panic buying in 2020, is now easing.
Applications for mortgages to purchase a home were down by 6.9% during the week ending Oct. 1 compared to the week before, according to the latest data from the MBA’s Weekly Mortgage Applications Survey.
While this isn’t a huge drop, it’s still worth paying attention to in light of similar housing trends. In August, the average number of offers per home for sale fell to four offers, from 5.1 in May, according to the NAR. With fewer offers, buyers have a better chance of getting a home. Less competition also means fewer people around to bid up the purchase price.
“People are unwilling to keep paying higher and higher prices for homes,” says Joel Kan, associate vice president of economic & industry forecasting for the MBA. “People are priced out. I think you’re going to see sales prices moderating.”
Still Want to Buy a Home? Here’s What to Do
Buyers who have been sidelined by high home prices should continue to save for a down payment and closing costs. Prepare now to be in the best position to buy a house so when the time is right, you can act quickly.
Here are four key steps you should take to prepare for homeownership.
1. Check Your Credit Score & Report
Your credit score can determine how high or low your mortgage rate will be. Since it could take months or longer to improve your credit score, this is an excellent place to start. A credit counselor or good lender can help you make a plan to boost your score. This might include consolidating debt or—if you don’t have a lot of credit—opening a credit line so that you can begin establishing credit.
2. Identify Your Budget
Knowing your budget is crucial because it will dictate how much your down payment you have available, how much house you can buy, where you can buy and what amenities you can afford. Crunching these numbers ahead of time will also help you determine what cash you will have leftover for other living expenses, including eating out and vacations. Make sure to deduct your other existing expenses from your budget before committing to purchase a home.
3. Save Up For a Down Payment
The down payment is often the biggest stumbling block to homeownership, especially for first-time homebuyers. Getting over this hurdle might take some time and even mean making enormous sacrifices, like skipping the new car or getting a roommate to save extra money. There are also down -payment assistance programs, low-cost loans and grants available, so make sure you check all of your options.
4. Work With the Top Experts
From housing counselors to mortgage lenders and real estate agents, many skilled professionals can help you through the home buying process. Getting a great team behind you can mean the difference between winning the right house versus wasting time and money on a home you’ll regret later. Be sure you shop around, get recommendations from friends and family, and read online reviews. All of these things can help you identify the best housing experts for you.
The important thing is to be clear about your goals and financial capacity, so you don’t end up with buyer’s remorse. If you choose a starter home and stay in it for a few years while it builds equity, there’s a good chance you can sell it and use the profits toward a down payment on a home that checks more boxes. But above all else, don’t feel pressured to panic buy. Take your time, if you can, and watch what the market is doing.
Teta recommends keeping an eye on mortgage rates and inflation.
“If those look like they are headed upward, buyers need to try to gauge whether that means now is the time to buy or it’s a good time to wait and see how that affects prices,” he says.