It seems like forever since prospective home buyers figured there would be mortgages available in the attractive 3-4% range. (Ironically, just a few years ago, there were many buyers who felt that a 4% mortgage rate was too high and went on to refinance at a lower rate of 2.75-3%).
Today, we talk about those rates as if they were a blip in history and we have to deal with rates as they have been climbing in the last year or so, in some cases up to the mid 7% range, while we reminisce about the good old days.
Prospective home buyers spent the summer in a sort of “waiting game,” waiting to see if and when the Fed would finally lower the fed funds rate, which would bring interest rates down to a level that would make a difference in their 30-year fixed mortgage, which is the most popular program used by home buyers. When the Federal Reserve met in July, they kept the federal funds rate at 5.25–5.5%, the highest it’s been in 23 years. We are now hoping and praying that when the Fed meets this week, they will consider cutting rates if inflation continues to slow.
So we wait and see if all the hype and talk is correct and the Fed cuts the rate by 0.25% to a target range of 5.0% to 5.25%, which could end the year with a target range of 4.0% to 4.25% if they follow up this cut with two half-point cuts in the fourth quarter.
There has to be a better way to somehow disconnect the federal funds rate and how it affects the housing market so that they can still control inflation while holding down interest rates for those looking to buy new homes in the real estate market.
In my opinion, one should not be driven by the other, and perhaps it’s time to come up with a new system to circumvent the way the high rates used to damp down the retail and wholesale markets, which end up damping down those who want to get into the housing market, but are getting slaughtered with these high interest rates.
You have a large segment of prospective buyers who have given up hope that interest rates will come down soon. They have changed their life plans accordingly and are sitting tight in their existing homes because they cannot afford to give up those 3% and 4% mortgages they already have, so they just stay put.
Many years ago, when the rates went even higher to the 13%-14% range, there were still some other options available to homebuyers that could keep the rates down.
Back then, there was still an assortment of takeover mortgages that buyers could assume from sellers at a reduced rate if the math worked. Meaning, if the balance on the takeover mortgage together with the money the buyer put down could cover the price of the home, the deal went through.
Under this scenario, the buyer taking over the remainder of that seller’s mortgage would also get the advantage of the reduced rate on the mortgage, which was typically in the 6%-7% range, a bargain back then.
Of course, the houses back then also cost in the $50,000-$75,000 range, which meant the takeover mortgage cost the buyer a fraction of the amount buyers must come up with today, which is usually in the $1-1.3 million dollar range or higher. Unfortunately, the days of the takeover mortgage ended long ago. Today’s residential mortgages do not typically have takeover mortgage clauses written into them, which makes such a scenario impossible.
But what if a new alternative came up that changed the odds for the better?
What if the Banking Feds came up with a new option allowing a homeowner to take their existing mortgage with them when they go out to buy a new home, thereby generating more activity in the real estate market by giving these buyers the flexibility of attaching their mortgage to a new home?
I guess the banks would not particularly like this option since they would imagine that it prevents them from opening new mortgage accounts at higher interest rates. But actually, the banks might also benefit a more flexible option since it would open up the availability of more housing inventory, thereby generating new loans rather than just sitting back and crying over the lack of housing inventory and lack of new mortgage applications as a result of the cooling down of the market due to higher rates.
The blending of these two alternatives might be a creative way to generate more movement in the market and higher inventory in this very tight market.
I doubt this will be an option that the powers that be will ever put into effect, but it should be a discussion at some point as an alternative of just dealing with high mortgage rates or not entering the housing market at all, both of which are not good for the economy however you slice it. Anyway, with the Fed expected to cut the rates this week, it might be the right time to sell your house. Something to think about! n
Anessa Cohen lives in Cedarhurst and is a Licensed Real Estate Broker (Anessa V Cohen Realty) with over 20 years of experience offering full service residential, management and commercial real estate services in the 5 towns of Long Island as well as the tri-state area. She can be reached at 516-569-5007 or Readers are encouraged to send any questions or scenarios by email to anessa@avcrealty.com.