Over the holiday, I chatted with Mike Koran, the founder of the Bay Area division of Primary Residential Mortgage, Inc to catch up on the rapidly changing lending climate and gain perspective for the year ahead. Mike is an excellent service provider to my clients and has proven to be an invaluable resource to me over the years. You can learn more about Mike here.
What are some of the changes you are seeing in consumer behavior after a very eventful second half of 2022?
2022 brought about one of the swiftest increases in interest rates in record history. This forced many buyers to initially sit on the sidelines because of reduced buying power. It also put sellers into a situation not seen in several years, where they had to accommodate their price to match buyer demand. Now that we have entered 2023, we are seeing a lot of these same buyers more open to the idea of purchasing ‘now’ as prices have become more palpable. Buyers are entering into contract at higher interest rates but at purchase prices that are reduced from the peak during the pandemic.
In an exercise I conducted comparing today’s higher rates but at reduced purchase prices to that of low rates with much higher purchase prices, most scenarios pencil out favorably for buyers ‘now’ vs. ‘then’. In fact, if you consider the notion that rates will come back down and Refinancing will be a possibility sometime soon, it’s a win-win to buy now.
Do you have any predictions on what we might see as it relates to interest rates in 2023?
There are headwinds and tailwinds occurring currently that could drastically alter the market in 2023. Headwinds: Global quantitative tightening; lack of foreign treasury buying and more debt to be financed than in any other period in history. Tailwinds: lower inflation, recession likely and mass excess in retail inventory. All of this equates to a strong possibility we will see 30-year fixed rates move to 5% during the first half of 2023, and the US 10-year treasury move back down to low 3% range.
What tools are consumers and agents using to take advantage of the current climate and the threat of rising interest rates?
There is a myriad of products that has surfaced because of the rising interest rate environment. One program that has gained popularity is the temporary interest rate buydowns where the seller will provide a credit at closing that is used specifically to buydown the interest rate for the first 2 or 3 years of the loan. The hope and intension here is to give the buyer a reduced payment long enough for the market to correct and normalize to rates that would allow for a Refinance to make sense.
Are there any recommendations that you think will be helpful for home buyers in 2023?
Unfortunately, with higher rates comes less lending and with less lending banks and investors have more time on their hands to scrutinize underwriting guidelines and perform audits on files. This has made lending in some instances more difficult, especially in the top-tier rate qualification. For this reason, we are always encouraging prospective buyers to get pre-approved upfront and as soon as they know they want to buy a home. I do believe that as rates start to normalize, we will start seeing more loan programs open opportunities for would be buyers that have been on the fence due to the affordability issues presented by higher rates.
