Category: Interest Rates (Page 7 of 27)

The Folly of Timing the Real Estate Market

September 29, 2023 / Tom Bonetto

Real estate is a substantial investment, often representing one of the most significant financial commitments an individual or family can make.

Given the importance of this investment, some are tempted to try to time the real estate market, hoping to buy at the lowest possible price or sell at the highest.

However, attempting to time the market in real estate is generally a bad idea, fraught with risks and potential pitfalls.

Let’s take a look at some of the factors…

Market Unpredictability

One of the fundamental reasons why trying to time the real estate market is a bad idea is the inherent unpredictability of market fluctuations.

Real estate markets are influenced by a myriad of factors, including economic conditions, interest rates, local trends, and demographic shifts. These factors are often difficult, if not impossible, to predict accurately.

As Tyrone Foster states in his article ‘Why Timing the Real Estate Market Rarely Works’: “Housing prices aren’t merely a byproduct of available inventory. They also depend on broader economic factors, mortgage interest rates, loan availability, incomes, and prospects for the future.”

Attempting to time the market requires forecasting these variables with precision, a task that even seasoned professionals struggle with.

Missed Opportunities

Market timing often involves sitting on the sidelines, waiting for the market to reach an optimal point.

However, this means potentially missing out on opportunities for rental income or property appreciation. In a rising real estate market, the property’s value may increase significantly, and rental income can provide a steady cash flow, all of which is forgone when trying to time the market.

Transaction Costs

Buying or selling a property involves transaction costs, such as real estate agent commissions, closing costs, and taxes.

Attempting to time the market may result in multiple transactions, each incurring these expenses. These costs can quickly eat into any potential gains from market timing, making it a financially inefficient strategy.

Holding Costs

While waiting for the “perfect” market moment, you may end up holding onto a property for an extended period.

During this time, you’ll incur ongoing costs like mortgage payments, property taxes, maintenance, and insurance. These holding costs can erode any potential profits from market timing.

Emotional Stress

Timing the real estate market can be emotionally taxing. Constantly monitoring market conditions and trying to predict the best moment to buy or sell can lead to stress and anxiety.

Emotions can cloud judgment and lead to impulsive decisions that may not be in your best interest.

Risk of Overpaying or Underselling

Attempting to time the market carries the risk of either overpaying for a property or underselling one.

If you wait for prices to drop but they continue to rise, you may end up paying more than if you had acted earlier. Conversely, if you try to sell at the market peak but miss it, you could undersell and lose out on potential gains.

Diversification

Real estate is just one component of a diversified investment portfolio. Trying to time the real estate market neglects the principle of diversification, which can help mitigate risk.

Relying too heavily on a single investment can expose you to greater financial vulnerability.

In Conclusion

Attempting to time the real estate market is generally a poor strategy due to the inherent unpredictability of market fluctuations, transaction and holding costs, missed opportunities, emotional stress, the risk of overpaying or underselling, and the neglect of diversification principles.

Instead of trying to time the market, it’s often wiser to focus on a long-term investment strategy, considering your financial goals, risk tolerance, and property fundamentals.

Contact me for more, as it would be my pleasure to get to know you and your goals, as real estate should be viewed as a long-term wealth-building tool rather than a short-term speculation game.

Today’s Mortgage Rate Environment: Implications for Real Estate

September 25, 2023 / Tom Bonetto

The mortgage rate environment has a significant impact on the real estate market, influencing both buyers and sellers.

Let’s take a look at the differences between a high mortgage rate environment, a low mortgage rate setting, and today’s situation….and their implications for the real estate sector.

Although mortgage rates are significantly higher than their all-time lows from 2020 and 2021, today’s rates are not that high relative to historic averages, believe it or not.

High Mortgage Rate Environment

In a high mortgage rate environment, interest rates on home loans are elevated. This situation can deter potential homebuyers as higher rates translate into increased monthly mortgage payments.

As a result, the demand for homes often decreases, leading to a slowdown in the real estate market. Homeowners who have fixed-rate mortgages may also be less inclined to sell their homes, as they are locked into lower interest rates, reducing the supply of available properties.

Low Mortgage Rate Environment

Conversely, a low mortgage rate environment is characterized by historically low interest rates on home loans. This situation stimulates the real estate market by making homeownership more affordable for a broader range of buyers.

Lower mortgage rates can incentivize individuals to purchase homes, thereby increasing demand. Additionally, homeowners with existing mortgages may choose to refinance at lower rates, freeing up disposable income that can be spent on housing or other investments.

Today’s Environment

What we are seeing today is a little bit different from historical norms, as mortgage rates are definitely higher that we’ve seen over the last 4 years, but the demand for homes hasn’t decreased!

Normally, when rates are higher, demand decreases due to affordability and home prices generally decline slightly. Today, however, home prices haven’t moved lower because there just aren’t enough homes available to satisfy the grown need for new homes.

So, today we are seeing higher rates AND home appreciation, an interesting phenomenon.

Affordability and Market Activity

One of the most significant impacts of mortgage rates on real estate is affordability. In a low-rate environment, more people can qualify for mortgages and afford larger homes, which boosts overall market activity.

Conversely, higher rates can limit affordability and decrease demand, leading to decreased home prices or extended time on the market.

Investment Decisions

Mortgage rates also influence real estate investors. In a low-rate environment, investors may see real estate as an attractive option for yield, potentially driving up property prices in sought-after areas.

Conversely, higher rates can make other investment opportunities, such as bonds or stocks, more appealing, reducing the flow of capital into real estate investments.

Economic Conditions

The state of the mortgage rate environment often correlates with broader economic conditions, as well. In a low-rate environment, central banks typically employ accommodative monetary policies to stimulate economic growth.

On the other hand, rising rates may indicate a stronger economy but can lead to higher inflation and reduced purchasing power.

Today, we are in a relatively high inflationary environment, so the Federal Reserve has raised the Federal Funds rates to highs we haven’t seen in years. Although the Fed doesn’t set mortgage rates, they do influence them with policy decisions. More on that here…

Long-Term Considerations

Ultimately, the mortgage rate environment plays a vital role in shaping the real estate landscape, but it is essential to consider long-term trends and local market dynamics.

While low rates may fuel short-term growth, they can also contribute to speculative bubbles.

Conversely, high rates can lead to market corrections but may offer more stable, sustainable growth over time.

Marry the House but Date the Rate

Essentially, don’t be afraid to buy the house you want right now because of external market conditions!

A mortgage does not have to be long term, in fact most people refinance their homes several times as mortgage rates improve or should they need to take cash out from their equity.

Committing to the house doesn’t mean you have to commit to today’s financing forever. Buyers can always look for a better financing opportunity down the road and make a change when the time is right.

Waiting to purchase a home and “timing the market” is one option…but it’s almost always a bad idea.

Why? Because no one knows exactly when rates will hit rock bottom – and home prices will continue to accelerate. More on that here…

In Conclusion

The mortgage rate environment has profound effects on the real estate market, influencing demand, supply, affordability, investment decisions, and broader economic conditions.

Prospective homebuyers, sellers, and investors should stay informed about prevailing mortgage rates and consider their implications when making real estate-related decisions.

More importantly, if a buyer finds the right home, purchasing now is a very good idea…as home values are continuing to increase AND they have the ability to refinance if/when rates come down!

A balanced understanding of how mortgage rates interact with the real estate market is crucial for navigating the complexities of property transactions and investments, so reach out to me to find out more!

Why Pausing Your Home Search Might Not Be a Good Idea

August 29, 2023 / Tom Bonetto

For those who have been shopping for a home recently, you’ve likely confronted more than a few challenges along the way.

High mortgage interest rates and rising home prices cut into affordability, pushing many would-be buyers to the sidelines. Secondly, a lack of housing inventory is only making matters worse.

woman with credit card pondering while buying online with laptop

Due to these conditions, some buyers have decided to pause their home purchasing plans on hold, at least temporarily. But is that such a good idea?

You can find out more from E rik Martin’s article at The Mortgage Reports here…

Temporarily stopping your home buying search might seem like a reasonable decision in certain situations, such as a volatile real estate market or personal financial uncertainty.

However, there are several compelling reasons why hitting the pause button on your home buying journey might not be the best move.

Ever-Changing Market

The real estate market is dynamic and ever-changing. Pausing your search could mean missing out on potential opportunities.

Market conditions can shift quickly, and a property that fits your criteria perfectly may become available during your hiatus.

In today’s market, for example, home prices are continuing to rise due to lower supply and higher demand. So, if buyers choose to wait, it’s a guarantee that they will pay more for a home in the future.

By staying active in your search, you can capitalize on favorable market conditions and secure a property that aligns with your needs and preferences.

Long-Term Hold

Moreover, real estate is a long-term investment that tends to appreciate over time. This is especially true if borrowers are looking to keep the property for an extended period of time, versus flipping it quickly.

By delaying a purchase, would-be buyers could potentially miss out on the appreciation of property values in their desired area.

This could limit their ability to build equity and wealth through homeownership. Over the years, the property they had their eye on might become out of reach due to escalating prices.

Interest Rates

Yes, interest rates are at much higher levels than they were 2+ years ago, but most experts agree that waiting for rates to come down before making a purchase is a risky strategy. Timing the market is always a very difficult task.

When rates do drop, many believe that there will be renewed interest and added demand in the real estate market…which means prices will rise at a faster pace than today.

By waiting, you might end up paying more for the same property when interest rates inevitably drop. Remember, borrowers can always refinance when rates go down, so ‘Marry the House but Date the Rate’!

In Conclusion

While pausing your home buying search might seem like a cautious approach, it comes with potential drawbacks that could impact your financial well-being and future prospects.

The real estate market’s volatility, fluctuating interest rates, and the potential appreciation of property values all underscore the importance of staying active in your pursuit of homeownership.

By maintaining a proactive stance, you position yourself to make informed decisions that align with your goals and aspirations.

Please reach out to me for more so we can strategize about the right options for you!

Why Are Mortgage Lenders Requiring Upfront Points Today?

August 21, 2023 / Tom Bonetto

There’s been a recent change in the mortgage marketplace, as lenders are now requiring borrowers to pay upfront discount points when obtaining a home loan.

This is much different than in years past, when borrowers could easily qualify for a home loan with no points – and in some cases even receive a lender credit.

To find out more about discount points, please refer to this article…

Why Is This the Case?

Today’s situation has everything to do with volatility in the mortgage market over the last few years.

In essence, it’s very difficult for lenders to determine the value of a mortgage consummated today, because it’s unclear where mortgage rates go next. Lenders need to make sure that they don’t lose money on each loan they originate.

So, to guard against this unknown, nearly all lenders are charging discount points to ensure at least some profits are being captured upfront.

Why Do Mortgage Lenders Charge Points?

Mortgage lenders charge points to collect profit upfront as opposed to over time via regular monthly interest payments.

Instead of waiting to collect interest each month once the loan is closed, they can collect some money upfront.

Lenders use upfront points to manage their risk. By requiring borrowers to pay discount points, lenders can ensure a more predictable profit over the life of the loan.

This can be particularly important when interest rates are expected to rise, as it helps lenders secure a steady income regardless of market fluctuations.

Mortgage investors generally make money from the interest charged on the loans they provide. However, many of the mortgages originated today might be refinanced quickly, all but eliminating their projected revenue stream.

By requiring up-front points, the lender is compensated for the reduced interest income they would have received over the life of the loan.

How Will These New Mortgages Perform for Lenders and Investors?

Because mortgage rates have more than doubled in a short period of time, there’s a great deal of uncertainty regarding recently-originated home loans.

The big concerns for lenders and mortgage investors is a situation where rates improve enough for many of these borrowers to refinance.

Will those borrowers who obtained mortgages in 2022 and 2023 keep them for the long haul, or will they quickly refinance them if/when mortgage rates improve?

Per The Truth About Mortgage’s article, “a recent stat from Black Knight found that at least 10% of 2022 mortgages would become refinance candidates if the 30-year fixed fell to 4.75%”. And many believe that number is low…

So, if these homeowners refinance, their loans no longer earn profitable interest for the investors. In normal times, lenders can sell their loans to investors at a premium, and use the proceeds to cover their commissions and your closing costs (via lender credits).

Currently, however, this is proving difficult because the value of these loans is essentially unknown. Hence, the profit is being taken upfront in the form of discount points.

In Conclusion

Today’s current mortgage rate environment is much more volatile than in years past. This has made it difficult for investors to determine the value of their underlying loans.

This is why many borrowers are seeing multiple mortgage points attached to today’s mortgage rates.

For example, if you’re planning to stay in your home or hold that investment property for a long time and have the upfront funds available, paying points could be a financially sound decision.

On the other hand, if you’re planning to move or refinance in the near future, paying extra upfront points might not provide as much benefit. It’s important to always compare the total costs and potential savings over the life of the loan before making a decision.

Do reach out to me to discuss the options of paying points…and how much!

Understanding Today’s Mortgage Rates

July 19, 2023 / Tom Bonetto

Mortgage rates are a critical aspect of the housing market, directly influencing the affordability and accessibility of homeownership for millions of people.

Today’s rates are influenced by a variety of factors, including the overall state of the economy, the bond market, inflation, and the Federal Reserve’s monetary policies.

I’m asked consistently about what the future looks like for interest rates. Unfortunately, there’s no easy way to answer that question because mortgage rates are difficult to predict, as there are many factors involved.

However, there is a good historic indicator of what might happen with mortgage rates, and that’s the relationship between the 30-Year Mortgage Rate and the 10-Year Treasury Yield.

Many believe that the Federal Reserve set mortgage rates – and that’s not the case. Traditionally, the movement of the 10-year treasury bond is a great measure for mortgage rates.

You can find out a bit more here from Keeping Current Matters…

The Historical Spread

Here’s a graph showing those two metrics since Freddie Mac started keeping track of average mortgage rates in 1972:

As the graph above demonstrates, the average spread between the two over the last 50 years was 1.72 percentage points.

More importantly, when looking at the trend line, readers can see when the Treasury Yield trends up, mortgage rates almost always react in the same direction. And, when the yield drops, mortgage rates tend to follow.

Finally, the gap between the two has remained about 1.72 percentage points for quite some time.

Today’s Spread

However, what’s important to notice now is that the spread is widening much more than normal. See the graph below:

The reason? It’s has much to do with the uncertainties in the financial markets today. Inflation, the recent banking foreclosures, and lack of confidence the Federal Reserve are all influencing mortgage rates and widening this spread. Investors essentially need to factor in more risk into their pricing.

Inflation is truly the critical factor affecting today’s mortgage rates. Inflation erodes the purchasing power of money over time, reducing the value of future loan repayments to lenders. To protect their investments, lenders tend to raise mortgage rates in response to higher inflation.

Therefore, understanding inflation trends can help borrowers anticipate potential changes in mortgage rates and decide when to lock in their rates for the best deal.

Moving Forward

It is also really important to understand this spread and its deviation from historical norms. What most conclude is that there’s room for mortgage rates to improve moving forward.

And, here are what a few experts think, as long as inflation abates.

From Forbes magazine:

“Though housing market watchers expect mortgage rates to remain elevated amid ongoing economic uncertainty and the Federal Reserve’s rate-hiking war on inflation, they believe rates peaked last fall and will decline—to some degree—later this year, barring any unforeseen surprises.”

Secondly, as Odeta Kushi, Deputy Chief Economist at First American, explains:

“It’s reasonable to assume that the spread and, therefore, mortgage rates will retreat in the second half of the year if the Fed takes its foot off the monetary tightening pedal . . . However, it’s unlikely that the spread will return to its historical average of 170 basis points, as some risks are here to stay.”

In Conclusion

Understanding today’s mortgage rates is vital for anyone considering homeownership or refinancing.

Mortgage rates are influenced by a complex interplay of economic factors, inflation, Federal Reserve policies, and housing demand. Being aware of these influences empowers borrowers to make informed decisions about their mortgage options, ultimately impacting their financial well-being and the overall real estate market.

Do reach out to me for more information, as it would by my pleasure to help you navigate these interesting times!

The Folly of Timing the Real Estate Market

Market Unpredictability

Missed Opportunities

Transaction Costs

Holding Costs

Emotional Stress

Risk of Overpaying or Underselling

Diversification

In Conclusion

Today’s Mortgage Rate Environment: Implications for Real Estate

High Mortgage Rate Environment

Low Mortgage Rate Environment

Today’s Environment

Affordability and Market Activity

Investment Decisions

Economic Conditions

Long-Term Considerations

Marry the House but Date the Rate

In Conclusion

Why Pausing Your Home Search Might Not Be a Good Idea

Ever-Changing Market

Long-Term Hold

Interest Rates

In Conclusion

Why Are Mortgage Lenders Requiring Upfront Points Today?

Why Is This the Case?

Why Do Mortgage Lenders Charge Points?

How Will These New Mortgages Perform for Lenders and Investors?

In Conclusion

Understanding Today’s Mortgage Rates

The Historical Spread

Today’s Spread

Moving Forward

In Conclusion

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