Long-term bond yields have risen for a multitude of reasons. These include recent economic data indicating a pick-up in inflation, such as the recent jobs report showing a tighter market and higher wages. Additionally, the recently passed tax cut legislation is going to drive budget deficits higher, and the Federal Reserve is tapering its bond-buying program. The 10 year Treasury yield, which correlates to the popular 30-year fixed-rate mortgage, has been hovering around 2.8% recently, compared to last year’s 2.2%-2.5% level.
In response, the 30-year fixed-rate mortgage has seen the rate climb to 4.22%, on average, according to Freddie Mac. This compares to under 4% for most of last year.
This situation creates stress for buyers, naturally. Higher borrowing rates mean a larger monthly payment, all else equal. However, you need not fret. You can use this situation to your advantage, and you do not have to get stuck paying more every month.
The greatest sensitivity
We have found the $3 million and under market the strongest part of New York City’s real estate market. It is also the most sensitive to interest rate changes for a variety of factors. Those shopping at the lower end are more sensitive to higher payments. Personal income may be up, but spending has risen faster. This means less savings, potentially pricing these homebuyers out of the market.
Luxury property buyers likely have alternative sources, including greater cash reserves, to fund the purchase. The market has already been experiencing weakness, in any case.
This seems like a frustrating situation, but it is not as bleak as it appears.
Hope for the home buyer
House hunters should not lose faith. If they are ready to make a purchase and see a deal, buyers should act quickly/ Sellers may not have caught up to the story since demand may not have softened, yet. They are typically slow to accept a slowing market. Therefore, if you are comfortable, and your buyer’s agent feels this is a fair price, do not be afraid to act. Interest rates could go up further, raising your monthly payment.
Assuming an $800,000 purchase and a 20% down payment, your monthly payment is $3.137 (principal and interest). Just a quarter-point rate increase causes your outlay to rise to $3,231, nearly an extra $100 dollars you would have to fork over per month.
Another strategy is to try to wait, hoping this gives you greater bargaining power. This is risky, predicated on higher rates and further softening demand, however.
U.S. Treasury yields retreated a few basis points this week. This was due to the stock market’s pullback. Investors took a “risk off” approach, piling into risk-free Treasuries rather than riskier assets, such as equities. The 10-year yield fell back to 2.77% from 2.84% in the wake of the equity market’s pullback in February.
While it is challenging to predict future interest rate moves, homebuyers should not count on this trend continuing. Ultimately, market fundamentals, with a particular eye on inflation, will be the driver of interest rates.