There’s no sugarcoating it—the housing market is challenging right now.
For potential buyers? Mortgage rates are currently at an eye-watering 22-year high and there’s a shortage of homes for sale, which is keeping prices elevated. As for homeowners who may wish to sell and maybe upgrade? Many aren’t budging. Having locked in or refinanced historically low mortgage rates in the last few years, many homeowners may be reluctant to sell due to the prospect of taking on a new mortgage at a much higher cost.
What will it take to spur more buying and selling?
"Mortgage rates will likely stop rising when inflation decelerates enough for the Fed to end its rate-hiking cycle," says Jake Weinstein, senior vice president of Fidelity’s Asset Allocation Research Team. "Since the Fed slowed its pace of rate hikes, we started to see some stabilization in the housing market."
While there's no accurate way to predict when, or how low, mortgage rates will decline, do not expect a return to the historically low borrowing costs that we saw over the past decade any time soon, says Weinstein.
Source: St. Louis Fed, Freddie Mac
Mortgage rates have been on a roller coaster over the past 3 years. The average 30-year fixed mortgage rate stood at 7.18% as of September 14, according to Freddie Mac. That's the highest since 2002 and a far cry from the 2%-3% seen in 2020 and 2021, an era during which the Fed cut interest rates to zero to help spur the economy during the pandemic. But even in the decade that preceded the pandemic, mortgage rates lingered around 3%-5%.
"We are coming off of a decade-plus period of extremely low interest rates and we have entered a period of inflation sticking around at higher rates than we've been accustomed to," says Weinstein. "You should expect higher interest rates to continue compared to the past couple of cycles, which ultimately means higher mortgage rates."
Several economically sensitive factors—especially further potential Fed rate hikes—could influence the direction of mortgage rates in the near term. That matters for homebuyers because even seemingly minute changes in mortgage rates can translate to thousands of dollars in interest over time. Over the past year, a homebuyer with a monthly $3,000 budget has lost about $71,000 in purchasing power as rates rose.1
Source: Statista, National Association of Realtors
Government-sponsored mortgage giant Fannie Mae forecasts the 30-year fixed mortgage rate to remain above 6% for the remainder of this year and in 2024. Meanwhile, the Mortgage Bankers Association expects the 30-year fixed rate to dip below 6% in 2024.
So how should aspiring homebuyers navigate a world of higher rates? Here are 3 considerations:
1. "Marry the house, date the mortgage rate"
An extended period of elevated mortgage rates means would-be buyers need to be hyper-focused on their budgets and what their potential monthly payments would be.
But amid this current era of higher rates, the expression "marry the house, date the mortgage rate" has gained popularity among real estate agents. Their thinking goes: Purchase a house now with the best available mortgage rate and plan to refinance later when rates decline. "If you know you want to be in a place for a long time and you found a location that's going to work for you—then refinancing down the road may be an option," says Meredith Stoddard, life events experience lead at Fidelity. "You can't have rates going up in perpetuity and affordability going down and inventory going down perpetually. Real estate is cyclical and something has got to give at some point."
Would-be buyers must tune into their needs and their short- and long-term financial prospects, Stoddard says. For some families, non-housing expenses like childcare or student loan payments are likely to decline over time, freeing up more cash to put toward housing. That might mean a mortgage payment that's a squeeze today could become more comfortable in a few years.
That said, prospective buyers should still be careful not to take on a larger mortgage than they can truly afford, as the ability to refinance at a lower rate is never guaranteed. "I don't think it's currently a good time for any outsized risks," Stoddard says. Fidelity generally suggests limiting your total debt-to-income ratio (considering both potential mortgage payments and other debt) to no more than 36%.
2. Be prepared to compromise
It's important to recognize that compromises are an inevitable part of the homebuying experience. Downsizing your price range, which would lower monthly mortgage payments, is an option, Stoddard says. "If owning real estate is really important to you, then what are you willing to give up in order to get that? It might mean buying a smaller place and adding onto it or moving later."
Indeed, when it comes to making compromises, Stoddard warns about the effects that reality TV and social media may have on aspirational homebuyers. Real estate influencers who overemphasize aesthetics and TV shows that depict dramatic "before and after" home renovations can serve as inspiration, Stoddard says, but they can end up creating unrealistic expectations.
Being bombarded online with images of luxury interiors, stunning views, or idyllic outdoor space can distort our perceptions of what's attainable, particularly for first-time homebuyers. But instead of viewing compromise as a negative, Stoddard says, potential homebuyers should see it as a means of prioritizing what truly matters. This may mean the location, the commute, the school district, or outdoor space.
"You can have this Instagram vision of what you want your house to be like, but the reality is there's always a trade-off," she says. "Just accept you're not going to get everything. These kinds of compromises were important decades ago and they are are even more important than ever in this market."
3. Stay focused on your target markets
Closely following trends in local markets is crucial for aspiring homebuyers. Stoddard recommends asking agents to run reports on list-to-sales ratios, which compare the final sale price of a property to its original listing price, in your desired locations. This metric can provide insights into market conditions and the dynamic between buyers and sellers.
For example, a ratio of 100% means a property sold for its exact listing price. Greater than 100% means it sold for more, which could indicate a competitive market where bidding wars might be occurring. And less than 100% signals that a property sold for below its listing price, which can be a sign of a buyers' market, among other factors.
"The most important thing with real estate is it's so local," Stoddard says. "I would encourage people to really get to know their market. You want to keep an eye on the trends to see whether properties are going over or going under list-to-sale ratios."
In addition, signing up for real estate email alerts and actively monitoring the pace of new listings in specific zip codes can offer a glimpse into the available inventory and whether it's picking up or slowing down. Doing research and staying on top of trends can give buyers more confidence for when it comes time to make a move.
"It's easy for a layperson to keep an eye on trends just like an economist," Stoddard says. "You're getting that educational foundation and getting comfortable with the trends and understanding how they cycle through your area."
The bottom line:
A myriad of factors will impact the direction of mortgage rates over the next year or so, particularly if inflation cools to an extent that allows the Fed to end its rate-hiking cycle. However, as with stock market investing, trying to time the housing market is a tricky endeavor. "There isn't a perfect time to get in until you look back in hindsight," Stoddard says. "I've spoken to more people over the years who wish they hadn't waited than those who regretted buying when they had the chance."