To Buy Or Not To Buy, Or Even To Refi?
It's been a long, difficult stretch for the housing industry. As with most aspects of recovering from the Great Recession, progress in housing has been uneven. However, recent signs point toward a more stable market with gradually rising interest rates and home values.
If you are trying to decide whether to buy a new home or refinance an existing one, you're probably thinking, "We've heard this story for years about buying now before interest rates rise. Is this the time when the predictions come true?"
The truth: nobody knows for sure. It is fair to say that more evidence is piling up toward higher interest rates in the near future. Should this spur you into buying or refinancing now, before the hike? Perhaps it should — if you have already done the necessary groundwork and preparation. Otherwise, to see if you need to take action, it's best to do some calculations based on the most likely predictions for interest rates and home prices for your market.
There's Still Time, But Probably Not Much
Many analysts expect mortgage rates to creep up over the next week — but weekly or even monthly analysis of housing data can cause confusion and/or heartburn. Long-term trends give a clearer picture.
The national average on a 30-year fixed mortgage is 3.47% according to Freddie Mac, up 0.05 percentage points from the previous week. These are still incredibly low rates in historical perspective. Excepting a stretch from mid-2012 to mid-2013, in the depths of the housing crisis, 30-year fixed rates have never been as low as they have been over the past three months.
Meanwhile, Zillow notes that home values have risen by 5.1% over the past year (9/2015 – 9/2016), following the same rough trend since home values bottomed out in early 2012, but Zillow predicts only a 2.7% increase for the next 12 months. This prediction likely assumes interest rate hikes by the Federal Reserve that should slow the housing market.
Mortgage applications are also down, with a 6% decrease from the previous week. However, mortgage applications are very sensitive to incremental rate hikes, making them more reactive data than long-term market predictors.
Other economic indicators, such as wage growth and jobs, have been trending upward as well. Realistically, this should start to show up as inflationary pressures, but annual inflation is still well below the Fed's target of 2%.
So what does this all mean? Nationally, the collective data implies that interest rates will slowly rise in the future, and home values will continue to trend up as well. You probably have time to get things in order if you are not truly prepared to buy, but time is running out to get the optimum benefits.
Location, Location, Location
National trends may suggest it's an optimum time to buy — but what does your local market predict? That's the set of data you must pay attention to in order to find your best deal. Supply and demand in certain areas can overheat local markets, without an obvious explanation.
Keep a passing eye on national trends but a sharp eye on your local market, because you don't care whether you can afford the median house or a house halfway across the country — you care if you can afford your dream home a few miles away.
On the national scope, you want to assess the odds of some market shock or highly unpredictable event that affects rates — say, for example, one of the strangest presidential elections in American history.
Let's Get This Over With
There are many reasons why we would all like this election to be over with as soon as possible, but we'll stick with an economic one: assessing market risk. All markets like predictability, and it's an understatement to say that the current presidential candidates present a contrast in that regard. Markets are constantly adjusting based on what they expect (as of this writing, tilting toward a Clinton victory — but in this wacky campaign, who knows?).
The housing market is no different. It is directly affected by the Federal Reserve's decisions, which in turn are affected by market conditions. Notes from the last Fed meeting in September suggest that the Fed is leaning toward another rate hike, but the odds of it happening at their November meeting, immediately before the election, are slim.
Philadelphia Fed President Patrick Harker recently said, with respect to the election and interest rates, "It may be prudent to wait until we have resolved some of that uncertainty." Translation: there may be post-election turbulence to factor in, and the Fed does not want to be accused of influencing the election in any case.
In short, the Fed is likely to raise interest rates soon, but not before December — and recall that the last rate increase was only 0.25%. The four interest rate hikes predicted for 2016 were also expected to be 0.25% each. As you assess your options, it seems prudent to factor in an interest rate hike — but not a large one, and not right away.
Even though mortgage rates are on the rise and most signs point to continued housing market growth, your personal situation and local market should have as much influence on your actions as the market. Do you have a specific dream home in mind that becomes available? Has your family outgrown your home? Are home prices in your area rising rapidly, possibly pricing you out of your preferred home?
If your situation says, "buy", start by assessing the type of home you want to buy and your financial readiness to buy it. Do you have the suitable credit score and down payment necessary to get the home you want at a reasonable price in your area, and if not, are you willing to downsize your home goals, move to a different area, or take the time to rebuild your credit score?
Keep in mind that multiple interest rate increases are more likely in the time it takes to rebuild a credit score, and that home prices are also likely to rise. If you're in a situation where you're stretching your limits and are not willing to compromise on your housing goals, you may want to lock in today's extremely low rates.
Next, calculate the economic tradeoffs of a refi or new home purchase throughout the next year, assuming a worst-case short-term interest rate hike of 1% (the same 4 x 0.25% hikes predicted for 2016) and using housing price trends in your current area. MoneyTips calculators for both mortgage and refinancing are available to assist with your decision.
If, after performing suitable research and analysis, you do decide to buy or refi, don't look back. Don't be one of those people who lies on a tropical beach fretting whether or not they got a better deal than the couple lying next to them. Relax and enjoy your new home, or, if you refinanced, your new lower payments. Life is too short to worry about such things.