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Rising interest rates: Considerations for homebuyers

Anyone who recently bought a home or is currently in the homebuying process, knows how difficult it’s been. We’ve seen historically low interest rates, low home inventory and rising home prices which has made for a competitive market. As we’ve come out of the pandemic, we’ve started to see some shifts. While the market is still competitive and inventory is low, inflation has caused another spike in home prices and interest rates. Let’s take a look at the current market and how homebuyers can navigate it.

Current market

Home prices have been rising since 2012, but we saw more drastic increases starting in 2020. According to the National Association of Realtors, in March, home prices were up 15 percent when compared to last year. The median price of a single-family home is now $368,200. Demand continues to outpace supply, leading to bidding wars among homebuyers. In April, sales of previously owned homes fell to the lowest pace since the pandemic started. Existing home sales were down 2.4% compared to March.

Interest rates have also been a factor. Interest rates were at historic lows for much of 2020 and 2021. These low rates helped spur a huge increase in the number of homebuyers. In July 2020, the average rate on a 30-year fixed mortgage was below 3 percent. Since the start of 2022 we’ve seen a steep increase in mortgage rates with the average rate going above 5 percent. Home sales have remained high as buyers rush to find a home as rates continue to rise. With interest rates rising, we expect to see home sales slowdown and prices level off.

If you’re thinking about buying a home soon or are currently shopping, you may be wondering how to navigate the changing market. We’re facing rising interest rates, low home supply and a competitive market. As a homebuyer here are a few things to keep in mind given the current market.

Don’t rush homebuying in this market

It can be easy to see rising interests and low inventory and feel the need to rush. Buying a home is one of the most important purchases in your life and rushing the process could leave you with a home that doesn’t fit your needs or is too expensive. It’s normal for interest rates to rise and fall and for markets to adjust accordingly. We currently have high home prices and rising interest rates which can make owning a home significantly more expensive.

Given this news, your first instinct may be to rush out and buy a home to beat the market. There’s a few reasons why this isn’t a great idea.

You don’t want to be upside down

First, buying a home at the top of the market price could lead to you owning a home that is upside down. This means that if home prices decrease, you may owe more than its worth. Bidding wars among homebuyers are common leading to bids significantly over asking price. Home values can and will fluctuate over time so rushing to buy a home now when the market is high could lead to difficulties later.

Stick to your budget

Similarly, rushing to buy a home can cloud your judgement. Low inventory, high demand and rising interest rates have led to high prices. Bidding wars may tempt you to put in a high bid, but I would advise against this. Life happens and you will run into unexpected expenses. Buying a home at the top end of your budget or even over it will make life more stressful. Your future self will thank you.

Don’t settle

Rushing can also lead to settling. You’ve looked at a few homes you like and put in your bids only to lose out. It’s frustrating, but it won’t be more frustrating than living in a home that doesn’t fit your needs or isn’t in your desired neighborhood. Make of list of your wants and needs and do your best to stick to it. It can be easy to get caught up in the bidding process and seeing others wanting a certain home. Consider if this specific home is really the one worth overbidding on.

Do your homework

You may feel tempted to cut corners for your bid to win. It’s not uncommon to see buyers bypass inspection to speed up the process. It’s still important to research the area by driving by the home at different times of the day, checking out the neighbors and researching the quality of nearby schools. Don’t let the frenzied feeling of the market cloud your judgement and make you feel like you should rush.

Explore your options

You may feel like you need to buy a home now before rates go up more but, it’s important to remember that rates and home prices fluctuate over time. Take a long-term view. While a higher interest rate may raise your mortgage by $50 or $100, buying a home in a few months when prices drop will put you in a neutral position. If interest rates continue to rise, we may see some buyers priced out. This will help lessen demand and could drive home prices down a bit. Higher interest rates can lead to a decrease in home prices as buyers aren’t incentivized by the lower rates to buy now.

Due to rising interest rates, we’ve seen increased interest in Adjustable Rate Mortgages (ARM). The benefit to an ARM is that your initial rate may be lower. It’s important to note that the rate of an ARM will change over time so talk with your lender if it’s the right option for you.

Given how much the market has changed, you may find that it’s best to rent for now. This will allow you more time to assess your options and let the market cool down. With the Fed expected to raise rates more this year, we may see the housing market cool a bit and make it easier for buyers to find a home.

The best advice I can give is not to panic. As we’ve seen over the past two years, markets change frequently and keeping a level head will help ensure you don’t up in a home that doesn’t fit your budget or needs. Home prices haven’t quite adjusted to rising interest rates so give the market some time to level off.

Stephen Spears

About Stephen Spears

Stephen Spears leads Bremer's Community Banking Team. In this role, he oversees secondary marketing and affordable lending functions and supports the bank in meeting its commitment to establish a greater presence in serving BIPOC communities and businesses. Stephen brings more than 25 years of financial services experience to Bremer’s Senior Leadership Team and has a particular knowledge base in residential lending. Prior to joining Bremer Bank, Stephen served in other senior leadership positions for KleinBank, GMAC-RFC and US Bank. Stephen is committed to the principals of a just society, servant leadership, and community development. Step...

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