You need to buy a home but prices haven’t come down and mortgage rates keep rising. Is there another option besides renting?
Maybe. The Mortgage Bankers Association (MBA) reports that while the average 30-year fixed-rate mortgage rose to 7.67% last week, the rate on the average 5-year adjustable-rate mortgage (ARM) actually went down, to 6.33%. MBA Vice President and Deputy Chief Economist Joel Kan says a lot of buyers took that option.
“The level of ARM applications increased by 15% over the week, bringing the ARM share up to 9.2% of all applications, the highest since November 2022,” Kan said. “The yield curve has become less inverted in recent weeks and ARM pricing has certainly improved.”
Over the last two decades, the 30-year fixed-rate mortgage has been the number one selection for financing a home purchase. That’s because buyers could lock in an interest rate of 3% to 4% for 30 years.
The five-year ARM readjusts after five years and few buyers want to take a chance that rates would be lower then when they could lock in a very low rate for three decades. But that script has now been completely flipped.
What is the motivation to “lock in” a 7.67% mortgage rate when it’s very possible rates could be significantly lower in a couple of years? The difference in the monthly payment between 7.67% and 6.33% on a $300,000 loan is $270.
Wait for price declines?
Another option is to wait to see if prices will eventually fall. Wall Street analyst Meredith Whitney predicts that will happen when more baby boomers decide to downsize and sell their homes. But she says it may affect home prices in just a few states.
According to her analysis, Pennsylvania, Connecticut, New Jersey and Illinois stand the biggest chance of losing home values because an increasing number of residents are moving out of the state.
Real estate experts have explained the current housing shortage, in part, by pointing to boomers who are staying in their homes longer. Another reason is a dramatic decrease in homebuilding activity over the last 15 years.
The shortage has kept prices high, even though fewer buyers can afford the payments with mortgage rates at these levels.
