Mortgage rates are on the rise. Here’s what it could mean for San Diego’s domestic market
Higher mortgage rates mean the cost of buying a home in San Diego is more expensive than a year ago, but it’s not yet clear how or when that will affect the hot real estate market.
It’s an atypical period for the domestic market as mortgage rates rise along with prices. This is the opposite of how it is supposed to be and is uncharted territory for buyers and those in the real estate industry.
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The average rate for a 30-year fixed-rate mortgage was 5.64% on Monday, Mortgage News Daily said, down from 3.09% a year ago. That means the monthly cost of a resale condo at the median price of $640,000 — assuming a 20% drop — would be around $3,235, down from $2,466 a year earlier.
Two things you would expect didn’t happen in San Diego: that so many home buyers would exit the housing market that it would drive prices down, or that there would be many more homes that didn’t sell. not, which would limit competition.
Instead, buyers across the country – since January – rushed to buy homes before rates rose further and created the hottest market of any point in the pandemic.
In April, 74% of homes in San Diego County sold in two weeks, data center Redfin said, much faster than at any time in the past four years. There were 2,952 homes for sale during this period, a slight increase from 2,200 in January. But inventories remain well below levels from the same time last year when there were 3,793 homes for sale, and also below 5,961 homes for sale in 2020 and 8,030 in 2019.
Chris Anderson, chairman of the board of the Greater San Diego Association of Realtors, said it was still a seller’s market, with most homes receiving multiple offers, even as mortgage rates rose. Even slight declines in offers do little to change the home buying climate.
“Instead of getting 30 offers on a location, you get 15,” she said. “It’s just too restricted an environment. We have almost no inventory.
Anderson said the lack of homes for sale keeps pressure on the market, though a few buyers may have lost out on rising rates. Even with higher monthly mortgage payments than before, she said many buyers see it as a better alternative to renting – which has also seen significant gains over the past year. Rent in San Diego County has risen 13.6% year over year, real estate firm CoStar said, to an average of $2,263 per month.
Housing analysts say that if rates get high enough or buyers change their minds about home ownership due to rising costs for just about everything else, it could eventually slow the market. It hasn’t happened yet.
Matt Shaver, mortgage adviser at Finance of America, said his refinancing applications have almost completely dried up, dropping to two from 15 at the same time last year. However, he is processing seven purchase mortgages, exactly what he had at the start of May last year.
“It’s still very busy,” he said. “It’s still crazy.”
However, Shaver said rising mortgage rates were starting to push buyers out of the market.
“I have buyers who are being sold. It is a reality,” he said. “I have some that are really pushing the envelope with their debt-to-income ratio. The rates have hammered them. That house you wanted for $450,000, then you can only afford $420,000, now it’s at $400 $000.
As bad as things may seem for Shaver’s customers, mortgage rates have always been much higher than they are now.
For example, the rate on a 30-year fixed rate mortgage was 9.9% in March 1988. This does not mean that the cost of buying a home was higher back then, even with higher interest rates. In March 1988, the median home price in San Diego County was $131,000, or about $325,092 after adjusting for inflation in today’s dollars. In March 2022, the median home price in San Diego County was $805,000.
Will mortgage rates continue to rise?
It’s hard to say what will happen to mortgage rates over the next few months, with many leading economists disagreeing.
Conventional wisdom holds that mortgage rates are more likely to rise than fall in the near term as the Federal Reserve has signaled that it is taking an aggressive course to rein in inflation. It raised its benchmark interest rate by half a percentage point last week, its biggest rise in two decades.
Mortgage rates generally follow the yields of mortgage-backed securities. These bonds typically track the 10-year US Treasury yield.
A higher rate means more than just a change in monthly payment – although most buyers buy with this in mind – but also limits borrowing capacity.
The financial website Nerd Wallet broke it down like this: if a borrower who could only afford a monthly payment of $1,700 started buying a home in February (with rates around 4%), the buyer could afford to borrow $356,100. At 5.25%, the same borrower can now only afford a $307,900 mortgage, losing $48,200 in borrowing capacity.
Buyers rushing to buy a home before rates rise may want to consider that there is no consensus on what will happen. The Mortgage Bankers Association predicted that mortgage rates in mid-April will be 4.8% by the end of the year. Economist Lawrence Yun of the National Association of Realtors told Forbes last week he expected they would be 5.5% by the end of the year.
The Federal Reserve has said it plans to keep raising rates to curb inflation, but some economists believe that will come to a halt in the event of a global crisis. Some examples would be another surge of COVID-19 or an escalation of war in Eastern Europe. Alan Gin, an economist at the University of San Diego, said these events could deter the Fed from pursuing its current course.
“If we get these external events, it could put the brakes on what the Federal Reserve is going to do,” he said, “they may consider that we cannot risk a significant downturn in the economy because of these external events .”
Gin said other forecasts for mortgage rates may be too optimistic, especially given how quickly rates rose last week. Most of the forecasts were made more than a week ago or in April, which makes Gin think that rates could be closer to 7% by the end of the year, given the recent escalation.
Potential Strategies for Buyers
Homebuyers have a few options to deal with rising mortgage rates, according to Shaver and other analysts. While these options may not work for everyone, here are some ideas:
- Shop around for the best interest rate: Rates have changed so quickly that not all lenders are on a uniform level, Shaver said. This allows a potential buyer to shop around for the best rate. “It’s like the Wild West there,” he said of fares everywhere.
- Apply for Seller Credit: This might be a difficult strategy, given that San Diego homes always sell quickly, but it doesn’t hurt to ask a seller if they could lower the purchase price. Shaver said a buyer recently managed to do this on a $900,000 condo in Little Italy that had been on the market for 66 days. If a home has been in place for a long time and the seller really needs to sell for some reason, this scenario may work.
- Buy interest rate with “points”: It is possible to get a lower rate if the buyer is willing to pay for it. Lenders often allow buyers to pay in advance to qualify for a lower rate by buying points. A mortgage point usually costs 1% of the total mortgage amount. When you buy points, you instantly get a lower interest rate. This means that a lower monthly mortgage payment and over the term of the mortgage can save money in the long run. But not always. Shaver said the reason he finds this option a little riskier is that if mortgage rates drop, homeowners can refinance in a few years and might not get the cost savings they were looking for.
- Get an adjustable rate mortgage: This type of mortgage sends shivers down the spine of most of us who lived through the 2008 housing crisis. Loans start at a lower rate (about 4.65% as of Monday, Mortgage News Daily reported) for five to the first 10 years of the loan, then begin to adapt to the prevailing rate plus a margin. The idea was – before the housing crash – that people could either refinance into a fixed rate loan at the end of the adjustable term or sell the house. With rates rising, adjustable rates are becoming popular again: the Mortgage Bankers Association says ARM loans account for 10% of recent applications, up from 3% at the start of the year. Shaver said the loan works best if the person plans to sell the home after a short time or refinance as soon as rates start to rise. ARM loans got a lot of the blame for the subprime mortgage crisis because many people ended up with homes they couldn’t afford when their rates adjusted – and the bubble burst. At the time, many were poorly underwritten, interest-only loans with short interest rates. Today, most ARMs are taken out as fixed rate mortgages and require a down payment.
In a white paper published this week, Zillow senior economist Jeff Tucker wrote that high interest rates and other market changes could start to make things better for buyers, possibly limiting the need to explore options such as an adjustable rate mortgage.
He wrote that the national number of homes for sale has increased since March, a sign that the market is finally cooling. As expected, San Diego’s inventory numbers aren’t growing as much as some parts of the country, but they are growing. Tucker said an escalation in the number of homes for sale might not mean a big price change, but it would at least give potential buyers a break from the bidding wars.
“This doesn’t mean a housing crash is coming or even that prices will fall,” Tucker wrote, “but rather that the rate of price growth will likely slow and more homes will be available for sale.”