How Homebuyers Can Navigate Mortgage Rate Volatility
In today’s conversations about the housing market, there is plenty of concern among potential buyers over whether they can afford a home should rates continue to rise.
That’s understandable with the recent surge in Treasury yields and the Federal Reserve’s September decision to hike the federal funds rate, Realtor.com noted.
Admittedly, it’s a murky world in which buyers need to feel some reassurance that buying a dream home is not out of reach.
Realtor.com said that for that reassurance, potential buyers need guidelines about how to plan for rate volatility in the months leading up to their purchase.
A report from Realtor.com looks to the past, measuring monthly mortgage rate changes since 2000 to quantify the expected movement in rates over a 12-, six-, and three-month period to help buyers build wiggle room into their budgets.
12 Months Out: Allow for 100 bps of Movement
Realtor.com noted that for its rule of thumb when it comes to planning a purchase one year out, it focuses on the middle-80% band of outcomes.
It said that just 10% of months since 2000 have seen rates fall by more than 98 basis points from 12 months prior, and just another 10% have seen them rise by more than 94 basis points. Realtor.com noted that for the purposes of having a round number and a conservative estimate, its recommends that buyers looking to purchase in 12 months build in about 100 basis points of variation in either direction to today’s 30-year fixed mortgage rate.
Buyers looking to purchase in one year should be ready for anything between a mortgage rate of about 6% and one of about 8% based on today’s rates and historic volatility, Realtor.com said. If a buyer’s monthly budget for principal and interest is $2,000, that equates to being able to take on a loan balance of $272,567 in the high rate case or $333,583 in the low rate case.
It said that the potential variability in rates one year out can create a range of more than $60,000 in homebuying power for this hypothetical buyer. Near the median of the national price distribution, that equates to a large share of the for-sale home inventory that is either affordable or not based solely on the mortgage rate.
Six Months Out: Allow for 75 bps of Movement
Realtor.com noted that cutting the time range in half creates a bit less variability in the mortgage rate.
It said that on a six-month horizon, 37.2% of the time the mortgage rate stays within 25 basis points above or below its current level. The middle-80% band of outcomes ranges from -63 to +63 basis points in the website’s history, so it encourages buyers to add 75 basis points of cushion to the current rate when determining how much home they can afford.
Right now, those seeking to buy in six months should add or subtract three quarters of a percentage point to the roughly 7% level Realtor.com sees now to cover their range of likely outcomes when it comes time to home purchase. It said that for the same hypothetical buyer with a $2,000 per month budget, the loan balance they can take on would range from $279,169 in the 7.75% rate case to $324,824 in the 6.25% rate case.
Three Months Out: Allow for 50 bps of Movement
Nearer to closing, Realtor.com said the range of rate outcomes condenses further at the three-month window.
Realtor.com said that half of the time (49.7%), the 30-year fixed mortgage rate has moved by less than 25 basis points in either direction from three months prior. Home buyers can feel more assured that they have a good sense of where rates will be when it comes time to buy a home. The middle-80% band of outcomes for three-month changes to mortgage rates is from -40 basis points to +45 basis points.
The website said that for a conservative estimate, it suggests that buyers three months out from their purchase should allow for 50 basis points of movement from the current rate in either direction by the time of their purchase.
Realtor.com said its hypothetical $2,000 per month buyer who is three months from purchase should be considering rates as low as 6.5% and as high as 7.5%. Those equate to loan balances of $316,422 and $286,035, respectively, Realtor.com said.
That roughly $30,000 difference is sizable and is a sign of how much buyers need flexibility. A buyer setting for the midpoint of this range would have to drop their home price target by no more than $15,000 if rates move against them in all but the 10% worst scenarios, while if rates move favorably, an extra $15,000 of purchasing power could be added for the same monthly budget, Realtor.com noted.
The website cautioned that mortgage rate volatility is an unfortunate reality of home buying.
What a buyer can afford is constantly shifting, Realtor.com noted, leading to uncertainty and frustration when the perfect home ends up just out of reach.
