After years of rock-bottom interest rates, the Federal Reserve has raised the benchmark rate from 2.25 percent to 2.5 percent. With only eight increases in the last 10 years, and three in 2018, the fourth hike - and highest in a decade- may add to the reverb in the housing market.
While the Fed doesn’t set mortgage rates, the federal fund rates they institute impact short term and variable interest rates. When the Fed rate increases, the cost of lending between banks and lenders does as well. These financial institutions may choose to pass the incurred costs to consumers in the form of higher rates on mortgages.
The good news – “Mortgage rates have declined slightly, which opens up the possibility for better home sales if the latest trend continues into the new year,” states Keller Williams Chief Economist Ruben Gonzalez. “But mortgage rates are still well above last year’s rate and are already having a noticeable effect on demand.”
“We’re hearing more about buyers pushing back on home prices. First-time buyers are now dealing with further reduced budgets because of the higher interest rates, and most sellers are now in a situation where they will have to take on a mortgage with a notably higher interest rate than the one on their current mortgage. The relative difference in rates is likely to impact the decisions of people who currently hold mortgages at arguably the lowest rates we have ever had.”
Already, brokers, agents, and real estate teams are preparing to make the most of today’s market. Here they share how they have been working with consumers and builders to keep sales flowing.
Take Advantage of the Present
Mega agent, broker and KW MAPS Coach David Hoffman has been studying micro and macro markets for years. Prior to moving to Keller Williams, Hoffman was a staff economist at the Tax Foundation. For his expansion teams in 12 cities, Hoffman keeps his agents informed about economic changes that impact real estate so they, in turn, can educate their clients.
“We tell them that rising rates mean less affordability because less buying power makes for higher payments. Our agents are reaching out to everyone in their databases to help their clients think through what the next few years may mean,” he shares.
“We’re encouraging anyone who’s thinking about selling in the next three to five years to sell now. This will allow them to preserve their down payment from the sale of their current home and get the best possible payment terms on the new house.”
Know the Language of Financing
In Kirkland, Washington, Paul Hurme’s company, TeamBuilderKW, provides in-house sales and marketing for builders and developers. With 90 percent of his business in new construction, in response to decreasing affordability, builders are offering financing incentives that extend beyond typical closing costs or appliance upgrades.
He says, “We’re seeing specific promotions tied to the builder's preferred lender that allow for customers to buy their interest rates down either for the life of the loan, like a 30-year fixed, or for shorter terms, such as a 7/1 ARM.
“In our world, instead of slashing prices, the solution has been to offer an attractive financial incentive for our customers and to get them into an interest rate that allows them to purchase the home at a monthly payment that they can qualify for and sustain long term. That’s why it is incumbent for the on-site salesperson and for brokers that practice traditional residential resale to be well-versed in the language of financing and economics.
“In our current market, we must couple the art of selling with conversations about financing. To that end, we're actively training to make sure our salespeople are beyond competent in discussing financing and financial incentives with their customers. This is as important as knowing comps, home features, schools, and commute times.”
Re-Review Mortgage Options
As the rate increase moves into more headlines, clients will be looking to their agents for counsel and the best mortgage recommendations.
“If you haven’t done so yet, now is the time to re-review mortgage options in your area to ensure your clients are getting the best deal possible,” advises A.J. Berzsenyi, president of Keller Mortgage. “There are several things to keep in mind before bringing a mortgage company in front of your clients.”
Are rate quotes based on a full loan profile? Many factors affect a borrower’s interest rate and most advertised rates and quick quotes from loan officers unrealistically assume top credit scores, 20 percent down, etc. Don’t be swayed by savvy advertising. And refuse to settle for quick answers filled with disclaimers. Get your buyer fully pre-approved so they have accurate figures before home shopping.
What do lender fees and rates look like? We’ve had situations where other lenders miss property taxes or underestimate a title fee. The only costs in the lenders’ control are the lender fees. The annual percentage rate, or APR, takes this into account and provides the simplest "apples to apples" comparison. Third-party costs like title fees, insurance and taxes are not included in APR because they are the same regardless of your lender. The ZeroPlus loan waives lender fees and credits $1,000 (on loans $150,000+) toward third-party fees.
Can the mortgage company close on time? Is their model set up to underwrite upfront, before home shopping? Do they order the appraisal immediately, or wait for a check or credit card? Since closing on time is paramount, we’ve designed a Direct2Underwrite system to help buyers avoid surprises and delays. We focus on pre-approvals where certified underwriters sign off on income and assets before a contract is even executed. We also order the appraisal the day we get the contract so it doesn’t delay the closing. Keller Mortgage doesn’t collect an appraisal deposit, so if the contract is canceled for any reason, we absorb the full cost of the appraisal, which happens about 10 percent of the time.
Berzsenyi offers a final word of advice to agents looking for guidance in this economic climate.
“Continue to remind your clients that although rates are higher than previous years, they still remain historically low. Over time, housing appreciation and mortgage paydown combine to provide one of the simplest ways to build personal wealth.”
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