How do we clear this interest rate hurdle? 

As of mid-June—which is typically the height of the Boston area spring season—it appears that the overall speed and volume of home sales may be slowing down.

Though the number of homes for sale remains extremely low, many home buyers who would be prepared to compete fiercely are holding back. Folks seem to be prioritizing long-awaited summer travel over making a competitive purchase at the moment. This is true even as Boston-area rents rise.

The wind-up in interest rates, a result of the Federal Reserve’s attempt to curb inflation, is impacting the mortgage industry, with 30-year mortgage rates climbing into the 6% range (which we haven’t seen since before 2012). 

That means home buyers have far less buying power than they did this time last year, when rates hovered near 3%—and notably less than even a few weeks ago, before rates crossed into the 5% territory. (What does a 2% interest rate spread look like? For a $750,000 purchase with 20% down, the difference in payment between 4% and 6% interest is $735 per month.)

We knew interest rates would trend upward as the country recovered from Covid-19 interruptions. And we know that rates even in the 5% range are still historically low. But the current climb is steep and abrupt. 

What will this shift in buying power mean for Boston-area communities, where a severe lack of housing over the past decade has led to intensive competition based on cash, and a continuous increase in home prices?

Prices could plateau. With few options on the market to choose from but faced with higher borrowing costs and already-high home prices, enough buyers could wait it out such that home prices plateau, and even drop in some markets. And that will create some opportunity for buyers who weren’t able to compete when the market was freewheeling.

Inventory remains tight. There’s still so little housing that this remains a seller’s market. Even if prices adjust downward and homes sit on market for longer than a week or two—if a home is priced reasonably, buyers will step forward. 

Strategies

For buyers who need to purchase right now, here are some practical options: 

  • Consider that jumbo loans (higher than $648,000 in Metro Boston) currently offer lower interest rates. Can you adjust your down payment to allow your loan to cross into that jumbo threshold?
  • Consider adjustable-rate mortgages, such as a 10-year, which come with a markedly lower rate and can provide enough stability to ride out the current and coming market shifts until the next favorable time to refinance into a 30-year.
  • Consider refinancing six months after your purchase. If you do get a 30-year mortgage, note that interest rates typically dip between the end of the year and the beginning of the new year, which could be the right moment to refinance into a lower rate and drop your expenses.
  • Consider recasting your mortgage. If you receive a bonus or stock options––or extra proceeds from the sale of your previous home––note that you can typically apply those funds directly to the mortgage principal, which will recalculate your loan (at the same interest rate and loan term), decreasing your monthly payment.

Predictions

  • Assuming we’re entering a recession, layoffs may spread across industries. In such an economy, interest rates could be brought back down. At that point, many homeowners may opt to refinance to drop their monthly payments.
  • With housing options still very tight in and around Boston—and rents rising notably—the next spring season could return to previous competitive levels (even if prices are relatively lower due to rates).

For home buyers, this could be a moment to capitalize on, knowing that if you purchase with a mortgage, you’ll likely be able to refinance into more favorable loan terms in the near future. 

Our team is always here to brainstorm elegant solutions with you.