I’m a Mortgage Broker: Why First-Time Homebuyers Shouldn’t Wait for Rates to Drop
Last week, the Federal Reserve made a statement that bodes well for first-time homebuyers: they announced that they are unlikely to raise interest rates going forward, citing an end to rising inflation.
It means that now may be the best time for first-time homebuyers to buy a new home, according to Cameron Cook, senior wholesale mortgage broker with CSI Mortgage Design.
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If buying a home before interest rates drop seems counterintuitive, Cook explained why it actually makes perfect sense.
Five Steps to Lower Mortgage Interest Rates
Cook said the Fed’s announcement is the first in a chain of steps that all but ensure mortgage interest rates are about to drop.
“There are basically five steps needed for rates to come down, and we’re on step three — the Fed confirming it won’t raise rates,” Cameron said.
The five steps are:
Discretionary spending comes down. People have burned through all or most of the government support they received during the pandemic, and their savings are depleted.
Inflation cools. When people have less money to spend, they stop buying things, and thus, inflation cools. That, Cook said, is the most important thing for mortgage rates.
The Fed stops raising rates. The Fed stated last week that it is unlikely to raise rates.
Bond and note rates come down. When the Fed stops raising the rates, there’s a snowball effect in the bond market and the U.S. Treasury note yields come down.
Mortgage bonds follow us treasury notes. Once the Treasury notes drop, so will the mortgage bonds, and thus mortgage rates.
Cook expects mortgage rates will fall to around 5% to 5.5% from their current spot of about 6.5%. They reached 8% in October 2023.
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A Housing Market Shortage
Though Cook is based in the Denver market, he said he’s seeing the same set of conditions in markets all over the country: “Most markets have a massive shortage of inventory, that’s just a fact. We have a severely unbalanced market.”
Part of the reason for the housing shortage is that many people were able to lock in low interest rates during the pandemic, and now are resistant to selling because they have a good rate or a mortgage payment they like.
Why It Makes Sense To Buy Before Rates Drop
On the one hand, lower interest rates do mean that homebuyers may save money on the amount of interest they pay over time. However, there’s a condition, Cook said.
“Lower interest rates means more competition,” he said. “So with a shortage of housing, the prices will go up when rates come down. Thus, the price of the house going up offsets the savings on your payments by having a lower rate.”
And in his opinion, there’s not going to be a balanced market, with an equal amount of supply and demand for some time, possibly as many as three to seven years.
In an ideal situation, “where you have an abundance of home supply, then it would make sense to just sit tight and wait,” he said.
Buy Now and Refinance
First-time homebuyers who get into the market now will not only get ahead of the rush of potential buyers, but will also have the opportunity to refinance in the coming months when the rates do drop, getting the best of both worlds, Cook said.
“[That] will get you into the lowest payments you could have,” he said.
A Window of Opportunity
Cook calls this time a “window of opportunity,” for buyers.
“The clock just started ticking for buyers as of last Wednesday when the Fed flat told us we’re done raising rates, Cook said. “That’s what the market needed to hear.”
He said that window of opportunity will likely be open up until the third or fourth quarter of 2024, “before the madness and rush gets too brutal.”
“What you don’t want is competition — that drives up prices,” Cook said. “If you have four people making offers on the same house it goes to the highest price.”
So people in the financial position today to buy their first home should jump at the chance, Cook urged. “The clock is ticking!”
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This article originally appeared on GOBankingRates.com: I’m a Mortgage Broker: Why First-Time Homebuyers Shouldn’t Wait for Rates to Drop