Time To Lock-in Your Rate?

coins and a clock

The average 30-year rate for a home mortgage fell for the third consecutive week at the beginning of December. Lenders are gaining confidence that the FED rate hikes will slow in 2023. On November 17th, rates fell the largest amount in 41 years. From the 7% rate offered at the beginning of November, rates dropped to 6.5%.

As expected, mortgage applications were up in November as many homebuyers took advantage of the rate decrease. The FED has confirmed that their rate increase for the second week of December will be 50 basis points, rather than the 75 basis point hike of prior months.

FED vs Prime Rate

Their benchmark hike is usually 25 basis points. For the first time in many months, the FED is signaling that a pause in aggressive rate hikes may be on the horizon.

Mortgage rates are based on the prime rate, which is generally 3% higher than the FED rate.  When the FED increases the federal funds rate, the prime rate goes up too.

However, in the same way price reductions can make real estate offerings more attractive when demand decreases, lenders too, are responding to lower demand in their mortgage rate offerings.

The current FED rate is between 3.75% and 4%, which is why mortgage rates rose above 7%. However, for the week ending December 1st, mortgage rates had dropped to 6.49% and some lenders are offering a 30-year fixed rate at 6.33%.

Consumer Price Index

Inflation numbers, are tied to the Consumer Price Index (CPI) which tracks changes in US inflation over time. In June of 2022, inflation was at 9.1%, the highest it had been in 40 years. As the FED began aggressively raising their rate, inflation was reduced to 8.2% in September and 7.7% in October. To achieve their target inflation rate of 2%, we expect more rate hikes.

The difference in drop of .50 basis points could make the difference in how much house you can afford. It can also decrease your monthly payment. Even if the FED rate holds steady, when more buyers come back into the market, lenders will be less likely to lower their rates below the normal 3% profit margin. The FED rate is expected to peak between 4.5 and 4.75% in 2023.

Home values in Lake Tahoe and Truckee are remaining stable as inventory is not increasing like it did in 2008. The number of would-be buyers still outweigh supply. Redfin recently stated that the number of de-listed or withdrawn homes has increased. Some sellers are not interested in re-entering the market when they currently hold a mortgage in the 4% range. Homebuilders too, have lost confidence, which means the supply will diminish even more in 2023.

The Silver Lining

There is always a silver lining in market conditions. If you can lock in a rate over the next few months, it may actually be lower than what will be available in 2023. Additionally, with less buyer competition, you may be able to negotiate both, a better purchase price and lower interest rate.

For sellers, since home values are still relatively stable, this may be the time to get the best possible price. Inflation and recession fears will probably not cause any kind of instant drop in mortgage rates. These rates will always be based on what the FED is doing to control inflation, while warding off recession.

To spur the economy during the pandemic, the FED had dropped the rate to almost 0%. Many people were able to refinance or purchase with rates in the 3%-4% range. However, going back to 1971, the average interest rate is 7.7%. It may be that the real estate market needs to confront the new normal.

Of course, nobody knows what will happen with our economy in 2023, but since lenders are becoming more competitive in their offerings, it may be time to lock in your rate.

Contact me today for more information about real estate market conditions in Lake Tahoe and Truckee.