What the current market means for first-time home buyers

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Mortgage interest rates have nearly doubled in the past 15 months, sending a snowball to first-time buyers trying to weather soaring home prices and hoping they can achieve the American dream of home ownership. property.

First-time buyers made up 34% of all homebuyers, according to the National Association of Realtors’ “2022 Home Buyers and Sellers Generational Trends Report.” The majority of first-time buyers are millennials.

As of this writing, mortgage interest rates have fallen slightly. According to Freddie Mac’s Primary Mortgage Market Survey, the 30-year fixed rate mortgage averaged 5.25% for the week ending May 19, averaging 0.9 points. (One point is 1% of the loan amount.) The 15-year fixed rate mortgage averaged 4.43% with 0.9 points, and a five-year ARM averaged 4.08% with an average of 0.2 points.

Here’s something most first-time home buyers don’t realize: if you have a lower credit score, the interest rate on your loan will be higher. For someone with a 700-719 credit score with 20% to deposit, the average rate for a 30-year fixed-rate mortgage on May 19 was 5.833%, according to Bankrate. For someone with a credit score of 660 to 679, the average interest rate was 6.66%. But for people with a credit score of 800 or above, they could have gotten an interest rate of around 5.5%.

These numbers are a bit different from the Freddie Mac survey, as this survey also quotes the average number of points paid to secure these interest rates. The more points a borrower pays, the lower the interest rate. Bankrate figures do not quote interest rates with points, so average rates appear higher.

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You can also compare rates in your area for jumbo loans versus conventional loans before choosing a loan product. In some markets, the interest rate may be lower on one type of loan than on another. (A jumbo loan, in many markets, is a loan of $647,200 or less for a single-family home. It can be as high as $970,800 in high-cost areas.)

Some lenders offer better interest rates for loans with a lower loan-to-value ratio. They also charge a higher interest rate for loans with a net worth of less than 20%. So it pays to shop around and ask as many questions as possible to get the best mortgage program for the home you’re buying.

This difference is why it’s essential to ask potential lenders about interest rates, points, fees, special loan programs, and any other costs associated with getting your loan approved.

Although interest rates have jumped faster than most economists expected, house prices have also risen, adding to the financial pressure first-time buyers are feeling.

According to the Federal Reserve Bank of St. Louis, the median selling price of homes sold in the United States reached $428,700 in the first quarter of 2022, from $369,800 a year earlier. That’s a jump of 15.9%.

And while home price appreciation has slowed somewhat from the blistering pace at the end of 2021, home values ​​have been rising at a healthy pace since the end of the Great Recession.

Some of our readers have wondered if rising interest rates will cause home values ​​to fall, as they did in 2008 and 2009. During those years, the median home price fell by just over 10% per year. (Home prices have fallen much more in some places than others.)

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Unfortunately, for first-time buyers struggling to find a home to buy, Lawrence Yun, chief economist at the National Association of Realtors, doesn’t think we’re going to see a drop in house prices. Why? Because demand far exceeded supply and the quality of borrowers remained high.

“Underwriting standards are so stringent throughout the process that massive forced sales are unlikely. Additionally, inventory levels are at historic lows. means a drop from 20 multiple offers to one or two offers after 30 days on the market,” Yun said, noting that this level of competition is much more “normal and consistent with a house price appreciation of around 5 %. .”

But he also acknowledges that if the Federal Reserve raises interest rates, even more aggressively than the planned seven hikes, some housing markets could experience minor price declines; however, he thinks buyers will be rushing for a “second chance” at homeownership.

“In places like Phoenix, where home prices have soared more than 30% in a single year, a price drop of 5% or 10%, if it were to occur, would not create financial stress. Just like a stock price that goes up 30% and then gives up some [of the gain] does not cause any financial stress,” Yun said. “Only large and sustained price declines would be problematic, as happened from 2008 to 2012 with the mortgage implosion and foreclosure crisis.”

Of course, if you stretch out to buy a house, only to see its value drop while you’re living in it, you’re going to be upset. Instead, try to think of your home as a long-term purchase. This is where you will live, put down roots and enjoy your life.

Hopefully, by the time you’re ready to sell, your home’s value will have at least kept pace with inflation.

Ilyce Glink is the author of “100 questions every first-time home buyer should ask(Fourth Edition). She is also CEO of Best Money Moves, an app that employers provide employees to measure and reduce financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through his website, bestmoneymoves.com.

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