Understanding the Challenges in Today’s Housing Market
Introduction
If you’ve been eyeing your local housing market, fervently hoping for the chance to pounce on your dream home, current conditions are undoubtedly bleak. Buying a house has become increasingly challenging due to low housing inventory, higher prices, and soaring mortgage rates. In this article, we will delve deeper into the reasons behind these challenges and explore possible solutions to navigate this difficult market.
The Impact of Mortgage Rates
Finance expert Suze Orman sheds light on the current situation in her podcast, Women and Money. She emphasizes that the Federal funds rate has increased, reaching 5.25%–5.50%. While this rate represents the interest rate between banks and credit unions, it indirectly affects consumer interest rates, including those on credit cards, personal loans, and mortgage loans.
Unlike other loans, mortgage rates are tied to the bond market and the demand for mortgage-backed securities. Therefore, as the Federal funds rate rises, mortgage rates follow suit. Currently, the average rate on a 30-year fixed-rate mortgage loan for Freddie Mac stands at 6.96%, more than double the rate before the upward trend began last year.
These high mortgage rates significantly impact the supply of available homes. Many homeowners with existing mortgages have rates lower than 6%, with a substantial percentage even below 4% or 3%. Given the current conditions, homeowners are reluctant to sell their homes and take on higher mortgage interest rates to purchase a new property. As a result, housing inventory has plummeted, leading to a 3.3% decrease in existing home sales in June, according to the National Association of Realtors (NAR).
Soaring Home Prices
In addition to the challenges posed by high mortgage rates and limited housing inventory, home prices have been skyrocketing. The St. Louis Federal Reserve reports that after a brief decline in January 2023, home prices are once again on the rise. In June 2023, the median price of a home sold was $410,200, a significant increase from the $361,200 average just a few months prior.
These surging home prices are discouraging for potential buyers and often make owning a home seem out of reach. However, instead of waiting for a collapse in prices, finance experts suggest taking proactive steps to prepare for homeownership.
Taking Steps Towards Homeownership
If you are determined to buy a house despite the current challenges, there are several steps you can take to improve your chances:
- Save: Building a substantial savings fund is crucial when purchasing a home. Aside from the down payment, you also need funds for closing costs and ongoing homeownership expenses.
- Increase your credit: A strong credit score allows you to qualify for better mortgage rates. To boost your credit score, make a commitment to pay all your bills on time and check your credit report for any errors you can rectify.
- Repay existing debt: Paying off existing debt not only improves your credit score but also increases your budgetary flexibility to handle the additional costs associated with homeownership.
- Shop for a mortgage: When the time comes to buy, it is essential to explore mortgage options and obtain quotes from multiple lenders. This will enable you to secure the best possible rate.
By following these steps, you can position yourself as an attractive buyer in a challenging market.
The Future of the Housing Market
Looking ahead, it is uncertain whether there will be a decline in mortgage rates or a significant drop in home prices. Suze Orman suggests that property prices are likely to remain high unless a recession occurs, which is the only event that could potentially bring them down.
While a recession is not guaranteed in the near future, it is essential to maintain a positive outlook and prepare yourself as a knowledgeable and informed buyer. The housing market is influenced by various factors, including economic conditions and global events, making it crucial to stay informed and adapt your strategies accordingly.
Summary
The current housing market presents several challenges for aspiring homebuyers. Low housing inventory, soaring mortgage rates, and surging home prices have created a difficult environment for those seeking to purchase a property. To navigate these challenges effectively, it is crucial to save money, improve credit, reduce existing debt, and explore mortgage options from multiple lenders.
While there is no guarantee of a market correction or a decline in mortgage rates, staying informed and taking proactive steps towards homeownership can increase your chances of success. Remember, the housing market is influenced by various factors, and maintaining a positive mindset while adapting your strategies is essential in this dynamic environment. By preparing and positioning yourself as a well-informed and diligent buyer, you can increase your chances of realizing your dream of owning a home.
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If you’ve been eyeing your local housing market, fervently hoping for the chance to pounce on your dream home, current conditions are undoubtedly bleak. I originally hoped to buy a house alone this yearbut I’ve decided instead to pin my hopes on 2024 and spend 2023 saving money and otherwise putting myself in the best possible position to buy (more on that later).
Today’s market is governed by a few factors: low housing inventory, higher prices, and much higher mortgage rates than we’ve seen in several years.
In a recent episode of her podcastsWomen and money, finance expert Suze Orman took a closer look at current conditions and offered some insight into why potential home buyers are having a tough time and what we can expect going forward. Let’s take a closer look.
Rates remain high…
As Orman has discussed, the Federal funds rate it was increased again late last month, and now stands at 5.25%–5.50%. It’s important to remember that this is the interest rate that banks and credit unions lend to each other and is not a direct reflection of consumer interest rates on credit cards, personal loans and mortgage loans. But when this rate goes up, other rates tend to go up too.
Mortgages they are special in that their rates are tied to the bond market and the demand for mortgage-backed securities affects mortgage rates. It’s a terrible time to get a mortgage, as rates are currently more than double what they were before they started climbing early last year — 6.96% is the average rate on a 30-year fixed-rate mortgage loanfor Freddie Mac.
…while inventory remains low
Orman points out that these higher rates are having a decisive impact on the supply of available homes. As he pointed out, 92% of Americans with mortgages have a rate of less than 6% and of those, 61% have a rate of less than 4% and 23% have a rate of less than 3%. Under current conditions, nobody wants to sell a home and accept a much higher mortgage interest rate to buy a new one. So, low inventory: Existing home sales fell 3.3% in June, according to NAR.
And homes for sale have higher prices. According to the St. Louis Fed, home prices are on the rise again, after a drop in January 2023. In that month, the median price of a home sold was $361,200. But as of June 2023, that average price was $410,200. Ouch.
Is there any hope for the future?
So all of this is quite daunting for would-be buyers like you and me. And Orman doesn’t think we’ll see a collapse in mortgage rates anytime soon. He noted that this current situation is well outside the norm. This is perhaps not so surprising, since we have all experienced a once-in-a-century global public health crisis and still feel the full effects, financial and otherwise.
As Orman put it, “It looks like property prices are here to stay for a while longer. I don’t know what would bring them down, to tell you the truth, other than a recession.” Whether we will see a recession this year or next remains to be seen, but so far the economy is moving forward.
How can you prepare to buy a house?
Want buy a house Anyway? I’m with you: I’m thrilled that my rental days may soon be behind me. Here’s what I did, and what you should do too, if you want to be in the best possible position to get a mortgage loan.
- Save: Chances are a home is the biggest purchase you’ll ever make, so the more money you can set aside, the better. Remember, not only do you need a down payment and money for closing costs, but for each other as well home ownership costs.
- Increase your credit: The stronger yours credit score, the better the mortgage rate you can qualify for. So it pays to make a new commitment to pay all your bills on time each month and check your credit report to see if there are any mistakes you can remove.
- Repay the debt: Do you have an existing debt? If you can improve your earnings e pay off a current debtnot only will you improve your credit score, but you’ll free up wiggle room in your budget for those new costs you’ll incur.
- Search for a mortgage: When it’s time to buy, get rate quotes from more mortgage lenders. This will give you the best chance of getting the best rate possible.
It’s not an easy housing market these days. Stay positive, friends, and take the time to make yourself the best buyer you can be.
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