Prospective first-time homebuyers are facing a significant quandary, with the majority indicating in a recent poll their reluctance to enter the housing market until interest rates become more favorable. Despite current mortgage rates hovering around 7.5% for a 30-year fixed-rate loan, which, historically speaking, isn’t considered exceptionally high, many potential buyers are unfavorably comparing them to the rates of just a few years ago. During 2020 and 2021, rates were below 4% on average, and they remained below 5% for most of the 2010s.
Danielle Hale, chief economist at Realtor.com, notes a notable shift in generational expectations, with many prospective buyers unable to fathom mortgage rates exceeding 6%. This sentiment is echoed in surveys conducted by BMO Bank and Realtor.com, which found that both prospective first-time buyers and homeowners considering selling expressed a desire for rates to drop below 5% before committing to buying or selling a home.
However, real estate economists caution against the expectation of a swift return to the 4% mortgage rate. Realtor.com forecasts a slight easing of rates by the end of the year, to around 6.5%, while Daryl Fairweather, chief economist of Redfin, suggests that people may need to adjust to rates of 6% or even 7%. This adjustment comes after interest rates rose sharply in 2022, driven by Federal Reserve actions to counter rising inflation. The average 30-year fixed mortgage rate climbed from approximately 3% to over 7% within the year.
Lawrence Yun, chief economist at the National Association of Realtors, doesn’t anticipate a return to 4% mortgage rates anytime soon, suggesting that it could take a decade or more. He emphasizes that for many first-time homebuyers, particularly millennials in their mid-30s, a 7% interest rate is a novel experience, as they haven’t encountered such rates in their adult lives.
Orphe Divounguy, a senior economist at Zillow, provides historical context, noting that mortgage rates around 7% are more typical, with 4% rates being outliers observed during significant economic crises like the bursting of the tech bubble, the global financial crisis, and the COVID-19 pandemic.
Despite the hopes for rate drops, housing prices have remained stubbornly high, with existing home prices surging over 40% between early 2020 and mid-2022. The market is characterized by a peculiar standoff, where potential buyers and sellers alike are waiting for interest rates to decrease, albeit with diminishing optimism.
In this uncertain environment, financial experts offer some suggestions for frustrated homebuyers:
- Rent first: Consider renting before buying to explore neighborhoods and home options while waiting for rates to potentially decrease.
- Find a great agent: In a competitive market, a knowledgeable and well-connected real estate agent can provide valuable insights and help navigate the buying process.
- Consider new homes: The new-home market is thriving, with builders offering incentives like rate buydowns to make homes more affordable in a high-rate environment.
- Look for down payment assistance: Many local programs provide assistance to first-time and lower-income buyers, helping them overcome barriers to homeownership.
While the wait for lower mortgage rates continues, potential homebuyers may find these strategies helpful in navigating the current housing market landscape.