Olympic gold medal winners perfect their game plans and execute
precise timing and strategy to succeed. On the track, many runners wait too
long for their final push and cross the finish line out of medal contention.
The commentators exclaim that they “should have gone sooner.” The athletes are
left second-guessing themselves, wishing they had not waited.
Many buyers have been sitting on the sidelines, waiting for
rates to come down. Now that rates have plummeted from 7.5% in April to 6.34%
today, according to Mortgage News Daily, many buyers wonder if they should pull
the trigger and purchase now or wait for rates to fall further. Sitting on the
fence and waiting will prove to be the incorrect strategy, leaving many to wish
that they had bought sooner.
Long-term, 30-year mortgage rates move ahead of the Federal
Reserve Rate cuts. The Federal Reserve (Fed) has not cut rates once since the
historical increases from 2022 through 2023, yet mortgage rates have moved all
over the place, even eclipsing 8% last October. The movement is based on where
investors believe the direction that the Fed’s short-term Federal Funds rate
policy will move.
With inflation continuing to ease, the job market cooling, and
unemployment rising, it is becoming increasingly clear that the FED is too
restrictive, and they will need to cut rates when they meet in mid-September.
As a result, in less than two weeks, mortgage rates have plunged from 6.91% to
6.34% today. September’s rate cut, currently projected to be a 0.5% snip by
Wall Street, is already baked into today’s mortgage rates. When they do
trim the Federal Funds rate in September, do NOT expect mortgage rates to drop
another 0.5%. This is where buyers sitting on the sidelines are mistaken. They
hear that the Fed will cut, but the headlines and news refer to the short-term
Federal Funds rate, not long-term mortgage rates. When they do cut, expect
credit card, automobile, and equity lines of credit rates to all drop, which
are all tied to the Federal Funds rate, but NOT long-term rates utilized in
purchasing homes.
Can long-term rates go lower? Yes, they can. But today's mortgage rates are already factoring in future cuts totaling 1.25%. If the economy cools even more, which the trends in the data currently support, expect
rates to fall further next year. Yet, with the recent plunge, affordability has
improved dramatically. More potential buyers qualify. Buyers already in the
marketplace have witnessed their purchasing power increase; they can now afford
a much higher-priced home. With improving affordability, demand will rise just
as the inventory is about to reach its summer peak and begin to fall. As demand
increases and supply falls, market times will drop. There will be more buyer
competition, and values will rise again from here.
For a buyer looking to purchase a $1 million home today with 20%
down and a 6.5% rate, the principal and interest payment would be $5,057. Due
to a further constrained inventory and increased demand, values are anticipated
to rise at least 5%. That $1 million home would appreciate to $1,050,00. Even
if rates drop to 6%, the monthly payment would be $5,036, nearly identical to today’s payment at 6.5%. It is only
$21 less per month or $252 annually. In waiting, the buyer loses out on $50,000
appreciation and is looking at a $40,000 additional down payment.
What if 30-year rates drop to 5.5%? Isn’t it better to wait until that occurs? There is a rule of thumb when it comes to refinancing: when
mortgage rates drop by 1% or more from the current locked-in, fixed rate, then
it is an excellent time to refinance. The buyer that purchases a $1 million
home today could refinance next year if rates fall to 5.5%. The monthly payment
would drop from $5,057 to $4,542, a savings of $515 every month or $6,180
annually.For the buyer who waits to purchase until next year, the $1
million home is anticipated to appreciate at least 5% to $1,050,000. The
monthly payment would be $4,769. That is $227 per month higher or $2,724
annually compared to purchasing now and refinancing once rates drop to 5.5%. In
addition, waiting requires an extra $40,000 in down payment, and the buyer once
again misses out on $50,000 in appreciation.
Today is already one of the best times to purchase in the past couple of years. The Los Angeles County inventory is at 11,274, up 44% or 3,435
homes compared to last year. There are way more choices in every price range.
Demand, a snapshot of the number of new pending sales over the prior month, is
at 3,787, up 6% compared to last year, 221 more pending sales. With much higher
inventory levels and demand very close to the previous year, the Expected
Market Time, the number of days it takes to sell all Los Angeles County
listings at the current buying pace, is 89 days, much slower than last year’s
66-day speed. As rates remain at these low levels with duration, expect the
inventory to fall, demand to rise, and the Expected Market Time to drop for the
remainder of the year.
The most favorable condition for buyers is NOW. Just like so many Olympic athletes
crossing the finish line first, it is time for buyers to make that gold medal
decision and pull the trigger now. Do not wait.
