Facts, Rates and the Road Ahead…Happy 2025!

This content originally appeared in my preferred lender Phil Boos' newsletter on Monday, January 13, 2025, and has been reposted with permission.

Facts, Rates and the Road Ahead...Happy 2025!

I spoke to several people this week and there are still clients waiting for the rates to drop before they buy.

I highly recommend and even insist to evaluate the numbers before they officially hit "pause".

Here is a representative example that may help clients start off 2025 with an "AHA" moment

Example:  Waiting for rates to drop before you buy

If you are buying a home in Seattle at $1,000,000 with 20% down, your monthly payments will most likely look close to this:

▪️ Purchase price $1,000,000

▪️ Loan amount $800,000

▪️ 30 yr fixed @ 6.875% = $5255/mo

▪️ Estimated Homeowner's insurance = $125/mo

▪️ Property taxes = $600/mo

▪️ Total monthly cost = $5,980/mo

Even if we use an anemic appreciation level of 5% for King County, that home will be $1.05M in a year.

If the rates drop by 1% in that timeframe, the mortgage will go down to $4,969/mo (based on a now $840,000 loan at 5.875%) – that is a savings of $286/mo = $3,432 for the year.  

That $50,000 in appreciation drowns out the $3,432 gain of waiting for the rate to potentially drop a full 1%.

▪️ Home Prices:

→ The Case-Shiller Home Price Index showed a 3.6% year-over-year increase in home prices nationally, down from 3.9% in September.

→ Big cities outperformed the nationwide average:

▪️ Mortgage Applications:

→ Purchases: Fell 13% over two weeks, down 17% year-over-year.

→ Refinances: Dropped 36% over two weeks, but still up 10% year-over-year.

▪️ Mortgage Rates:

→ 30-year fixed-rate mortgage averages: Rose to 6.91% from 6.85% the previous week.

→ 15-year fixed-rate mortgage: Increased to 6.13% from 6.00%.

▪️ 2025 Predictions:

→ Rates expected to remain in the 6-7% range for most of the year.

→ Historical context: Average 30-year rate since 1971 is 7.72%.

▪️ Expert Advice:

→ Higher rates generally mean less competition, making it a good time to buy.

→ A 1% drop in rates could add 5 million eligible buyers, increasing demand.

Home Prices See Modest Growth The Case-Shiller Home Price Index, often called the "gold standard" for measuring home price trends, showed that prices increased 3.6% year-over-year. While this reflects slower growth compared to September's 3.9%, the data reveals a strong performance in larger cities. The 10-city index rose 4.8%, while the 20-city index increased by 4.2%, signaling that urban areas are outpacing the national average in home price appreciation.

Mortgage Applications Decline Mortgage application data for the past two weeks painted a mixed picture. Applications for purchases dropped by 13%, leaving them down 17% compared to the same period last year. Meanwhile, refinance applications fell sharply by 36% over two weeks but remain 10% higher than they were a year ago. These shifts underscore the ongoing challenges and volatility in the housing market.

Rising Mortgage Rates Impact Homebuyers Mortgage rates climbed this week to their highest levels since July. Freddie Mac reported the following:

▪️ 30-Year Fixed-Rate Mortgage: Increased to 6.91% from 6.85% the previous week. A year ago, it was 6.62%.

▪️ 15-Year Fixed-Rate Mortgage: Rose to 6.13% from 6.00%. A year ago, it was 5.89%.

This increase in rates reflects rising bond yields, which lenders use to set mortgage pricing. The Federal Reserve's decision to maintain higher rates to combat inflation plays a significant role. Although inflation has eased since mid-2022, it remains above the Fed's 2% target.

2024: A Year of Highs and Lows The past year brought both challenges and opportunities for the real estate industry. Mortgage rates briefly dipped to around 6%, spurring activity in purchases and refinancing. However, as rates climbed above 7% in September, many buyers and agents decided to wait for better conditions. Interestingly, experts suggest this high-rate environment presents a unique opportunity for motivated buyers. With fewer competitors in the market, securing a home may be easier now than during periods of lower rates.

Why Timing Matters If mortgage rates decline, demand is expected to surge. According to the National Association of Realtors (NAR), every 1% drop in rates creates 5 million additional eligible buyers. While not all will purchase homes, even a fraction of this increased demand could intensify competition and drive prices higher, particularly in a market with tight inventory.

What's Ahead for 2025? Industry experts predict that mortgage rates will remain relatively steady next year. Here's what major organizations forecast:

▪️ NAR: Rates near 6% will become the "new normal."

▪️ Zillow & Mortgage Bankers Association: Expect rates around 6.5%.

▪️ Redfin: Predicts rates closer to 7% by the end of 2025.

To put these rates in perspective, the average 30-year mortgage rate since April 1971 is 7.72%. The highest recorded rate was a staggering 18.63% in October 1981.

Key Takeaways While higher mortgage rates can feel daunting, they're still below historical averages and we're likely in a higher for longer environment. For buyers willing to act now, reduced competition offers a unique chance to enter the market. Please let me know how we can help!