Mortgaging Your Future
As recently reported in The New York Times, the rise in interest rates has significantly impacted home affordability for buyers who require mortgages. Home buyers currently face an average rate of 7.23% on a 30-year fixed-rate mortgage, the highest rate since June 2001. This compares to the lows of January 2021, when mortgage rates hit 2.65%. To put the rate change in perspective, a buyer purchasing a home for $1 million with a rate of 2.65% would need to find a home for $592,000 to have the same payment at current rates (assuming a 20% down payment). While home prices have cooled modestly since 2022, the median sales price of $416,000 in the United States is still up nearly 30% versus 2020 levels, compounding the challenge of finding a home. To manage payments in the face of higher rates, consumers have some options: purchasing a lower-priced house, putting down more cash, or renting.
Another option is to buy a home with the intention of refinancing in the future when rates go down. Those in real estate have a phrase for it: “Marry the home, but date the rate.” Often, the people offering this advice are motivated to sell real estate, such as mortgage brokers and real estate agents. In the article linked above, the chief economist for the National Association of Realtors expects rates to begin falling by the end of the year, and the Mortgage Bankers Association recently forecast that the average 30-year mortgage will fall to 5% by the fourth quarter of next year.
Buying real estate with the hope that one can refinance in the future is dangerous. At First Fiduciary, we have often discussed how difficult it is to correctly predict near-term moves in the economy and stock market. We apply that same reasoning to predicting interest rates. No one should rely on an interest rate forecast to make home purchases. Looking at mortgage rates over the last 50 years (chart below), the outlier is not today’s rate. Instead, it’s the years spent below 5%. There’s no guarantee that rates fall back to those levels. If the projected decline in mortgage rates doesn’t come to fruition any time soon, homebuyers today may be stuck with elevated payments for years.
In our view, a better course of action is to base homebuying decisions on the assumption that mortgage rates won’t go down. Only if the home is affordable in that scenario should a person proceed with the purchase. The Consumer Financial Protection Bureau recommends keeping total debt payments at or below 43% of earnings before taxes (debt to income ratio). Conservatively managing one’s personal finances is the best way to ensure meeting long-term financial goals.
Articles We Enjoyed:
Tennis Rivals and Friends
A touching story on two fierce tennis rivals who’ve since become great friends.
Study Drugs
Study drugs like Adderall might be making people worse at solving problems, not better.
Kidfluencers
Potential regulation concerning advertising geared toward children threatens to impair the lucrative “kidfluencer” business.
Shaker Heights
The New Yorker reviews a new book that details Shaker Heights and its history of policies aimed at integration of its citizens.
The Death of Summer
Post-Covid, travelers have been flocking back to their favorite beaches, but rising global temperatures threaten to change that.
Bud Light
Bud Light’s run as America’s best-selling beer seems to be over, but how did it get so popular in the first place?
Cancer-Detecting Yogurt
Scientists are working on a yogurt that could detect and deliver a treatment for certain types of cancer, potentially allowing millions of people to avoid colonoscopies.
Lithium
As more cars shift from gasoline to electricity, the world will need more lithium. A new source of lithium, recently discovered on the Nevada-Oregon border, could be a game changer.
Notable Reads:
Looking Backward
by Edward Bellamy
Julian West falls asleep in 1887 (the same year the book was written) and awakens over a century later in the year 2000. West is greeted by a utopian society with no war, famine, or poverty. Billed as a science fiction novel, the book is more a commentary on economic philosophy, and it’s easy to see why it is considered an influential work of both literature and political thought. Bellamy’s prior career as a journalist shines through too much, with the story acting as a long, fact-filled exposition detailing the year 2000 society. While thought provoking, there was not much plot and little to no drama. – AG
Restaurant Review:
FIG
Charleston, SC
FIG (Food Is Good) is an exceptional dining experience that seamlessly blends Southern flavors with a contemporary twist. The menu showcases locally sourced ingredients, resulting in dishes that are both innovative and satisfying. The warm and inviting ambiance, coupled with attentive service, makes FIG a must-visit destination for food enthusiasts exploring Charleston's vibrant culinary scene. The menu changes often, but we particularly enjoyed the Hogfish Crudo, the Ricotta Gnocchi alla Bolognese, and the Broiled Steamboat Creek Oysters. – AG
More Than A Trusted Investment Advisor
Recently, clients met with us to discuss real estate finance strategy. The clients own properties in three states, and the desire to be closer to family had them contemplating a purchase in one more. With only a small mortgage on one property and significant increases in their property values, they had many potential solutions at their disposal. We reviewed the options and their timeline and suggested a creative alternative to traditional mortgage financing. Let us know if you face any changing situations. We would be happy to help you strategize the best way to handle them!
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