In mid-July, the average for mortgage interest rates fell below 3% for the first time ever. However, they quickly rose above 3% again. Even so, rates have remained at historic lows for quite a while now. In the latest news, financial experts expect to see them continue to decrease over the next few weeks. This puts us in an extremely unusual market that benefits both buyers and sellers. Buyers pay less to borrow money while a higher demand for housing raises prices, which is good news for sellers.
Mortgage Interest Rates
What is a Risk Premium?
At the beginning of the pandemic, when unemployment numbers rose dramatically, the Federal Reserve quickly reacted by lowering its target interest rate. That currently sits at 0% to 0.25%. This acts as the benchmark for everything from what banks pay you for your savings account to what credit card companies charge you in interest. Mortgage rates run higher, too. The difference between the 10-year treasury rate and the mortgage interest rate is called the risk premium. As of late last week, the 10-year treasury rate hit 0.55%.
Mortgage rates dropped off at a slower rate than the 10-year treasury yield. A healthy risk premium falls between 1.5% and 2% spread. In April, mortgage rates hadn’t fallen off much. So, the risk premium hit its highest point for 2020 at that time with a reported 2.71% spread. Currently, that has fallen to a 2.33% spread, which means good news for home buyers. If rates for mortgage loans continue to fall and meet past norms, that means we could see interest rates hit the low to mid-2% level for a 30-year fixed-rate loan in the upcoming months.
What Made the Risk Premium Spread Go Up?
When you buy a home, the initial mortgage company that funds your loan almost never stays your mortgage company for the entire length of the loan. That’s because it gets bought up by a federal agency (Freddie Mac, Fannie Mae, etc.). Recently, the Federal Reserve has been buying up a large number of these mortgages , aka “mortgage-backed securities” in an effort to level out the economic impact from COVID-19.
Then, factor in the volumes of refinancing applications lenders received lately. Partner that with COVID-19 restrictions and a backlog quickly emerged. Plus, investors tightened up their purse strings when the market was inundated with mortgage-backed securities. That actually pushed interest rates up a little bit. However, with the increase in refinancing requests, lenders began to hire and train more employees to handle the caseload. As they work through the backlog, we should see interest rates begin to fall in line with risk premium norms.
Should I Wait to Buy a Downbeach Home?
Honestly? No. Inventory levels in Margate, Ventnor, and Longport all have decreased dramatically since last year (down by 41%, 40%, and 32%, respectively). This has created a seller’s market. In fact, many Downbeach homeowners receive multiple bids for their properties shortly after listing. That’s forcing prices up even more. So, the longer you wait, the more likely you are to be spending more money on a property in the future.
Right now, it’s only conjecture that mortgage interest rates might hit in the low 2% range. If the 10-year treasury rate goes up, interest rates might stay closer to the mid to upper-2% range. It might even continue to hover around 3%. Even so, that still means a great rate for home buyers with excellent credit and some money to put down. If you like to gamble, you may feel like waiting a little while to see how the market plays out. It really depends on what you are comfortable with. Whichever option you choose, you need to make sure that your financials are in order so that you can make an offer when you find a Jersey Shore home you like. Contact Apex Realty when you’re ready to start looking.
Sherri Lilienfeld, Apex Prime Realty, Your Source for Jersey Shore Real Estate