The Federal Reserve raised interest rates again, leaving many homebuyers and sellers wondering what it means for their next move. Does a higher federal funds rate mean mortgage rates are headed higher, too? Not necessarily.
The Fed raised the federal funds target range by 25 basis points to 3.75% to 4%. This rate has a more direct impact on short-term borrowing costs, including credit cards, auto loans, home equity lines of credit and other variable-rate debt.
Thirty-year fixed mortgage rates work differently. They are influenced more by longer-term bond yields, mortgage-backed securities, inflation expectations and the broader economic outlook. If markets believe the Fed’s actions will help bring inflation under control, longer-term yields and mortgage rates could potentially improve.
That is why buyers and sellers should not assume one Fed decision determines where mortgage rates go next.
For buyers, look beyond the mortgage rate
Buyers who have been waiting for mortgage rates to come down should consider what else could change if rates improve.
Over the past several years, limited inventory and intense competition left buyers facing multiple offers, bidding wars and little room to negotiate. Today, conditions are different in many markets. Homes may stay on the market longer, giving buyers more opportunities to negotiate on price, closing costs and other concessions.
Consider a buyer looking at a $400,000 home. Today, that buyer may be able to negotiate a seller contribution toward closing costs or an interest-rate buydown while potentially negotiating the purchase price as well. If mortgage rates decline and buyer demand increases, some of that leverage could disappear.
Buyers should evaluate the entire transaction rather than focusing on the mortgage rate alone. A mortgage can potentially be refinanced later if rates decline. Buyers cannot go back and renegotiate the purchase price or seller concessions after competition increases.
The current market also offers opportunities. One strategy I like is looking for homes that recently fell out of contract and returned to the market. A seller who thought the home was sold may suddenly find themselves back at square one. If they have already purchased another property, are relocating or have another reason to sell, buyers may have more room to negotiate.
In those situations, a combination of a price reduction, seller-paid closing costs and funds toward a rate buydown may create more value than negotiating on price alone.
Sellers may need to be more flexible
Higher mortgage rates can quickly change what a buyer can afford. As purchasing power declines, the pool of qualified buyers at a particular price point can shrink, leading to fewer showings, longer marketing times and fewer competing offers.
Pricing correctly from the beginning becomes especially important in this environment. Sellers may also need to be more flexible than they were when buyers were competing heavily for limited inventory.
That does not always mean lowering the asking price. Contributing toward closing costs or helping fund an interest-rate buydown can make a property more affordable for a buyer while helping a seller get a transaction across the finish line.
Understanding what matters most to buyers in the current market can help sellers position their homes more effectively.
Looking ahead
Inflation remains one of the most important factors to watch because expectations about future inflation and economic growth influence long-term interest rates.
Energy prices are part of that picture. Developments in the Middle East, particularly oil movement through the Strait of Hormuz, could affect energy costs and inflation. If energy supplies normalize and oil and gasoline prices decline, that could help ease inflationary pressures and potentially create a more favorable environment for mortgage rates.
Employment, consumer spending, economic growth and future Federal Reserve policy will also play a role.
Ultimately, buyers and sellers should avoid making long-term decisions based on a single Fed meeting or one day’s movement in mortgage rates. Buyers should consider affordability, the price of the property, available concessions and whether the home fits their needs. Sellers should understand current conditions, price appropriately and consider terms that could help attract buyers.
Real estate is a long-term play. Rather than trying to perfectly time interest rates, buyers and sellers should evaluate the full transaction. Today’s market has challenges, but less competition and greater negotiating flexibility can also create opportunities that may not be available when conditions change.
Tim Deibert is President and Co-Founder of Note Mortgage.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].
