Housing prices and interest rates ‘aren’t going back down,’ expert says
Mortgage rates rose to their highest level in two years, putting homebuyers on high alert as further increases were on the horizon.
"Things aren't going back," Debbie Boyd, CEO of DLB Financial Services, told Yahoo Finance Live (video above). “So we have to stop thinking this is a bubble and just start thinking this is the case now. That's the real thing.”
The interest rate on the 30-year fixed-rate mortgage -- the most common loan for homebuyers -- rose to 3.69% last week from 3.55% the previous week. That's the highest level since January 2020, according to Freddie Mac, and well above the 2.73% average a year ago.
The rise in interest rates followed a surge in 10-year government bond yields, which rose above 2% this week for the first time since 2019. Solid January jobs growth and a high inflation report should accelerate the Federal Reserve's plan to raise interest rates to combat inflation, which is at a 40-year high.
“I think we will do three, maybe four hikes this year. That doesn't mean they're all going to be huge," Boyd said. "But even an eighth point or a quarter point seeps through the markets and makes everyone nervous."
(Image credit: Freddie Mac)
We are used to historically low interest rates
Although recent rate hikes have helped dampen homebuyer sentiment, the housing market remains scorching hot.
“If you need a new house, you will buy a house. If you move across the country and need to move, you're going to buy a house," Boyd said. "The price doesn't matter"
The median selling price for an existing single-family home nationwide increased 14.6% to $361,700 in the fourth quarter of 2021, according to the National Association of Realtors. As a result, new home buyers generally spent up to 25.6% of their household income on mortgage payments, further weighing on affordability for young buyers.
Single family homes built by KB Home are shown under construction in the community of Valley Center, California, June 3, 2021. (Credit: Mike Blake, REUTERS)
"Real estate markets are caught in a one-sided dynamic as many buyers are eager to find the right home before prices rise even further, but there are very few available homes for sale due to nearly a decade and a half of underbuild," said George Ratiu . Economic Research Manager at Realtor.com. "The benefits that ultra-low interest rates have offered over the past two years are fading and affordability is becoming a major hurdle for many buyers."
Still, interest rates are historically low. In comparison, the average interest rate on the 30-year fixed-rate mortgage hit an all-time high of over 18% in 1981, according to Freddie Mac.
“We are now used to historically low interest rates. I remember a few years ago, like 10 years ago, I got a 5.50% rate, and that was a great rate," Boyd said. “So everything is as we are used to. We have forgotten that interest rates were once higher than 2%.”
A home is listed for sale by owner on January 20, 2022 in Chicago, Illinois. Nationwide, existing home sales in December fell 4.6% from the previous month. This drop in sales is mainly due to a shortage of homes on the market. (Image credit: Scott Olson, Getty Images)
Now is the time to refinance or invest
While rising mortgage rates are likely to price out many young middle-income first-time homebuyers, now could be a good time to lock in a rate if you're looking to refinance or invest.
Homeowners rushed to refinance their mortgages in January during a three-week lull in rate hikes that lifted the 30-year fixed rate by more than half a point last month.
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