Part 2: Is now the time to buy?
Last week, I kicked off this 8-part series of the top questions that I have been asked over the last decade of helping Americans secure home loan financing. This is a lot to educate yourself on and consider, but it's important to do so because your home purchase may be the single largest expense of your life.
How will I know if I’m ready to own a home?
Is now the time to buy?
Is my credit score good enough?
How much does it cost?
Can I afford it?
Do I have to have a real estate agent?
What is the best financing option for me?
How do I get started?
Is now the time to buy? The right time to purchase a home is different for everyone. However, assuming that everyone asking this question is emotionally and financially ready, then there will be a few things to consider before answering this question.
In today’s market, it seems that most potential buyers are holding off, due to the mortgage rates because they want to wait for the interest rates to get lower again. A lower interest rate means that the cost of borrowing money is less. When the cost to borrow money is less, then the monthly payment would be lower. For example, a monthly principal and interest payment for a $200,000 mortgage with a 6% interest rate will always be higher than a monthly principal and interest payment for a $200,000 mortgage with a 4% interest rate.
Some industry professionals refer to this as “timing the market” or “market timing”. The market is unpredictable. People have tried for decades to time the market with costly regrets. Here is why attempting to time the market when buying a home to get a lower interest rate can be a costly challenge.
Let’s say you’ve answer question, #1 How Will I know if I’m Ready to Own a Home and you’ve decided that you’re ready. Congratulations! Now it’s time to figure out how much, when, where, etc… As you begin playing with mortgage calculators, you’re going to realize how much of a difference a monthly payment will be if you compare a payment at 6.5% versus a payment at 4.5%. This is the motive behind most who decide to wait for rates to go down.
3 challenges of waiting for rates to go down or market timing:
Challenge #1 of waiting for interest rates to go down is not knowing when they will go down or how much they will go down. In essence you have no idea how long it will take for the mortgage interest rate to drop down to however low you’re hoping for. It could be 3 months or it could be 10 years, depending on how low you’re wanting.
Challenge #2 of waiting for interest rates to go down is that even if or when they get as low as you demand, it’s important to remember that as mortgage rates go down, home values will go up. As mortgage rates go down, the demand to purchase a home will go up. As the demand to purchase a home will go up, so will home values.
Challenge #3 of waiting for interest rates to go down is the monthly cost that you’re spending in rent payments, which is 100% interest. The longer you wait to purchase a home, the more you’re spending in rent, while building NO EQUITY. You will never pay off, nor own the property that you’re renting while renting it.
While it’s extremely challenging to time the market, it is wise to understand how the market affects mortgage rates. Mortgage interest rates have been making headlines more over the last couple of years due to the pandemic and its affect on the U.S. economy. Without spending countless hours browsing the web or getting a finance degree, I usually advise my clients to look at these two indicators to get an idea of where rates may be headed. These are not exact, but there is a strong correlation between the fluctuation of these indicators and mortgage rates.
The Job Market
10-year U.S. Treasury Yield
The Job Market
This usually correlates with the health of the economy. If the job market is strong, that can imply that there is a strong economy. If the job market is weak, that can imply that the economy may be heading toward a recession or simply weakening. Wage Growth and Unemployment Rate are two specific indicators that provide insight to the health of the job market.
Wage growth can be interpreted as the amount of increase in earned wages as a result of inflation. Too much inflation can result in a recession. As inflation grows stronger, then wage growth will increase. When wage growth increases, this is an indication that mortgage rates will likely increase as well.
Unemployment rate is another job market indicator. As the unemployment rate increases, meaning more people are becoming unemployed, it can imply that the market is becoming weaker. In other words, if the unemployment rate increases significantly, it is usually due to large employer layoffs. Large employer layoffs are due to a variety of reasons, but mostly due to softening earnings (a decrease in sales revenue).
When you observe both the wage growth going up and the unemployment rate going up, this is a strong indication that the economy is getting weaker. When the economy gets weaker, mortgage rates will typically go down.
10-year U.S. Treasury Yield is another important indicator. A Treasury yield refers to the annual interest rate the U.S. government pays on the money it borrowers in order to raise capital by selling Treasury bonds. These are also known as Treasury bills or Treasury notes, but the terminology will depend on the amount of time it takes for maturity.
The whole motivating factor behind Treasury yields is demand. If there is a high demand for Treasury bonds, then that will result in a lower yield. If there is a low demand for treasury bonds, then that will result in a higher bond yield.
Investors pay close attention to bond yields. Here’s why: investors intend to maximize the return on their investments. Treasury bonds will not typically provide a greater return on investment than other investment options such as real estate or stocks. However, if investor demand in other options such as real estate or stocks is low, it’s because investors have lower confidence in those real estate or stock options.
The Treasury sells bonds at auction. When investors decide that their best option is Treasury bonds (high demand for Treasury bonds), then Treasury yields will decrease. This is due to low confidence in the economic outlook, i.e. lower return on real estate and stock investments and mortgage rates will decrease as well. When there is low demand for Treasury bonds, then Treasury yields will increase. As Treasury yields increase, mortgage rates will likely increase as well.
Looking at today’s market indicators, we will find that the US Treasury Yield has increased since March 2022. We will also find that the unemployment rate has been increasing, as well as wage growth. Couple these observations together and compare to what mortgage interest rates have been doing since March 2022 and you will find a strong correlation.
*Notice the unemployment rate doesn’t appear to be going up. However, thanks to Tyler Durden’s analysis Inside The "Strong" Jobs Report: Full-Time Workers -1K; Part-Time Workers +679K, we find that even though the unemployment rate isn’t INCREASING, the rate of individuals who are taking on additional part-time jobs has increased significantly as supported by Durden who stated, “…the total number of full-time jobs has declined by 288k in the past ten months, which however has been more than offset by the 886k increase in part-time jobs.”
The point here is that even though the unemployment rate seems stable, it’s actually not because full-time workers are also pursuing additional part-time employment so they can pay for the cost of inflation.
Wrapping it all up! If you're wanting to get an idea of where rates are headed, then you'll want look at these indicators: 10-year Treasury Yield, Unemployment Rate, and the Wage Growth Rate. If you'd prefer to save yourself some time and spend 60 seconds with an industry professional, then contact me.
At the end of the day, it’s still wise to understand what causes interest rates to fluctuate, but it’s not recommended to time the market, due to the reasons I mentioned. If you’re primary decision factor in purchasing a home interest rates, then I hope this information has been helpful. Please follow my blog at www.thehomeloanhub.com or subscribe to my newsletter and leave your thoughts.
The answer to Question #3: Is my credit score good enough?
This article was originally published on LinkedIn.
Terry Roberts, USMC Veteran | Sr. Loan Officer NMLS 397987 | E Mortgage Capital
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the homebuying process across America.
With a rich background spanning over a decade in the mortgage and real estate sectors, Terry Roberts has become a cornerstone in guiding over 10,000 clients through the complexities of the home purchasing journey in the United States. His expertise covers a broad spectrum of housing loans including conventional, FHA, VA, and cutting-edge new construction financing options.
Emerging from challenging early life circumstances, including teenage parenthood, dropping out of high school, and facing homelessness, Terry's determination led him to serve in the US Marine Corps. This decision was driven by a commitment to safeguarding freedom and securing a better future for his family. His active duty service in the US Marine Corps, marked by nearly a decade of dedication, instilled in him a profound desire to assist fellow Americans in achieving homeownership, a cornerstone of the American dream that he fiercely believes in.
Terry leverages his profound understanding of the real estate market to empower individuals in their pursuit of property ownership as a strategic investment for wealth generation. His journey from adversity to becoming a beacon of hope and guidance in the real estate domain is not just inspiring but a testament to his commitment to his clients' success.
Connect with Terry Roberts, a proud USMC Veteran and Senior Mortgage Broker (NMLS 397987), for expert guidance on your path to homeownership. Visit www.TerryRoberts.com at E Mortgage Capital, where every client's dream is approached with the respect and dedication it deserves.
Comments