What’s your Ugh?
Question of the week: What’s your “Ugh?”
Answer: This was a question I asked Linda earlier this week as we were going through the numbers for her new home purchase.
Linda had a busy June as the home she owned with her husband for more than twenty years had closed escrow, and their divorce was finalized.
For several years Linda had been making the payment on their home, about $2200 for the mortgage and $3000 including taxes and insurance.
Now entering the market as a home buyer, we were going through the options of purchase price, loan amount, monthly payments, within her ability to qualify based on her income.
Due to rates and pricing rising since we first started these discussions in May, the monthly payment had increased almost $200 per month.
When I told Linda the mortgage payment of about $3600 per month, and the total estimate for taxes and insurance of $4250*, there as a pause and then I heard, “Ugh.”
*Due to Prop 19 she will be able to transfer the property tax basis from the home she just sold to her new home, saving from $325-400 per month depending on the purchase price of her new home.
Ugh indeed.
At this point of the conversation, I brought up that Linda could wait for interest rates to drop and re-enter the market at time, hoping that the market was not more out of balance than it is now with more buyers looking than sellers selling. Even if prices increased 5%, depending on the rate when she decided to re-enter the market, she would have a lower monthly payment.
Or she could live with her “Ugh,” buy a property, when possible, today, in the current market, and then when rates drop could refinance at that time, lowering her payment.
Our purchase scenario was purchasing a property for $1,050,000 with $450,000 down payment and a mortgage of $600,000. At a rate of 7.00% her mortgage payment will be approximately $4000 per month.
I ran a scenario of the price going up 5% to about $1,100,000 and the rate on a $650,000 mortgage dropping to 5.5%, in which case the mortgage payment would drop to $3700 per month, $300 less per month than purchasing today in the scenario above.
Next, I ran a scenario of refinancing a $600,000 at 5.5% in the future if she were to purchase today, and the monthly payment would be about $3400 per month, as savings of $600.
There were two questions we agreed needed to be asked with the answer’s unknown at this time.
First, at what rate would she want to re-enter the market, or if she purchased now refinance? I used 5.5% as a rate as over the past year that is a number many clients have talked about as a rate they saw as a low rate at this time. But will Linda be willing to either purchase, or refinance if she purchases at 7.00%, at 6.25%, 6.00%, 5.75%…?
Second, how long will it take to see rates get back near 6% or lower? Six months, nine months, a year, the end of 2024…?
At this point I asked Linda, “What is your ugh?”
Which “Ugh” does Linda want to choose?
The Ugh of buying a home now with a payment that stretches her comfort level, and making that payment until some unknown point in the future when she might be able to refinance and lower her payment? The advantage is she is getting into a home, eliminating future price risk, and when the time comes refinancing to a lower rate and having a lower payment than if she were to purchase in a future market.
Or, the Ugh of waiting for an indeterminate period of time to purchase a home with an indeterminate price market, an indeterminate market as to “buyer” or “seller” that could be a frenzy of writing offers and competing with others or having bargaining power, and an indeterminate interest rate market and payment when she decides to re-enter the market.
Ugh, what choices for buyers in today’s market.
Personally, I prefer Ugh number 1. Purchase the home you can afford and secure in the current market environment and look to refinance in the future.
Last June many families were deciding if they were going to buy as rates climbed to and above 5%, or wait for rates to go down. One year later, it appears those who decided to purchase at the “very high” rate that was 2% higher than six months earlier, made the right decision.
Looking forward, rates are still climbing and likely have more room to go up. When the Fed finally decides to lower rates, will mortgage rates drop correspondingly? How long before rates drop back to 6.00%, much less go lower? At what rate will you feel it “right” to enter the market to purchase a home?
“Ugh” is an easy way to say, what risk am I willing to take? Because, if you want to purchase a home there is a risk decision as to buy now and pay more, or wait for who knows how long, and possibly pay lower.
What is your Ugh?
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Rates did not have a good week. Well, not a good Thursday, which resulted in not a good week. On Thursday ADP, the payroll company, released its monthly report on payrolls and salaries. The report stated that the private sector added 497,000 jobs in June, significantly more than the 267,000 in May and even more significantly than the 220,000 forecast by economists polled by the Wall Street Journal. Also in the report, those remaining on their jobs saw wages increase 6.4% year over year, and for those changing jobs their monthly pay increased 11.2%.
Markets reacted very negatively to the news. For more than a year the Federal Reserve has stated that a primary focus for determining what action it will take on its benchmark interest rate is the labor market. If the market remains tight, more people being hired, higher wages, dropping unemployment, they will continue to push rates higher to slow the labor market in its fight against inflation. The surprising numbers in the ADP report had investors worried that the Fed will increase its benchmark more than the two times the Fed has indicated it will increase before the end of the year. As well the report brought about speculation that rather than halting rate increases in 2024, or possibly lowering rates, there may be a few more rate hikes next year.
Rates spiked on the news. With all the above in play, investors sold off in stocks and bonds, and rates jumped as a result.
Today the Labor Department released its jobs report. The report provided the markets with a big sigh of relief. Considered more dependable than the ADP report, Labor’s data showed that the economy added 209,000 jobs in June, lower than the 240,000 expected and a lot lower than the 335,000 added in May. It was the lowest number of jobs added in the economy since the end of 2020. While wages went up a healthy 0.4% for the month, year over year wages are up 4.4%, behind inflation. Markets rebounded on the news, but not as much as they declined on Thursday.
Rates for Friday July 7, 2023 Thursday’s pop in rates pushed the conforming rate to 7.00% this week, lower than yesterday but higher than last Friday, equally the high for the year. Hopefully the Labor Department report will quell investor anxiety and this will be the high for the next several years. “Hopefully.”
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30-year conforming 7.00% Up 0.125%
30-year high-balance conforming 7.875% Up 0.250%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Mid-week holidays sure mess up the internal calendar and work ethic. I still don’t know if it is Thursday or Friday, or if yesterday was Sunday.
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
