Navigating the new normal of higher mortgage rates

[UNITED STATES] After decades of stable mortgage rates, mortgages ranging from 6% to 7% have become the new standard. Though buyers may be waiting for rates to fall before committing to a house purchase, high interest rates may be here to stay.

Recent economic data suggests that the Federal Reserve’s efforts to curb inflation have contributed to the persistence of higher mortgage rates. With inflation remaining above the Fed’s 2% target, policymakers have signaled that rate cuts may not arrive until late 2024 or even 2025. This extended timeline means prospective buyers could face a prolonged period of elevated borrowing costs, reinforcing the need to adapt to the current financial landscape.

Mortgage rates above 6% may appear high relative to recent levels, but they are consistent with the Fed's 50-year averages, which began tracking mortgage rates in the 1970s.

While higher interest rates may appear disadvantageous, particularly when making long-term financial commitments, there are some advantages to a high interest rate environment.

One often-overlooked advantage is the potential for slower home price appreciation. In recent years, skyrocketing demand and record-low rates fueled bidding wars and rapid price growth. Higher borrowing costs now temper demand, giving buyers more negotiating power and reducing the likelihood of overpaying in a hyper-competitive market.

Berkshire Hathaway house Services explains why house buyers need not necessarily wait for high mortgage rates, and how they might even be beneficial. Buyers should, however, be aware of the risks associated with high interest rates and verify that they can comfortably afford their mortgage payments.

Many house purchasers view high interest rates and mortgage rates as hurdles to homeownership, as they will spend more for a property in the long term due to higher monthly mortgage payments.

Experts also point out that buyers who secure a home now can later refinance if rates decline. Historically, refinancing activity spikes when rates drop by at least 1%. While timing the market is risky, locking in a manageable rate today provides flexibility for future adjustments without delaying homeownership indefinitely.

However, there are a few things to consider before purchasing a property, including the type of mortgage loan. The Berkshire Hathaway Home Services blog highlights how fixed-rate mortgages might assist protect against rate volatility. "If you have a fixed-rate mortgage, your monthly payment remains unchanged—a strong hedge against inflation even as home prices and other costs climb."

While most individuals prefer lower rates in general, this perspective misses the advantages of higher rates. For example, the blog observes that high interest rates raise yields on lower-risk products like high-yield savings accounts, CDs, and bonds. "Additionally, higher rates help your savings and money market accounts grow faster, making it easier to build cash reserves."

So, while higher interest rates may result in higher mortgage payments, they also yield higher returns on other assets, which can help to balance the increased mortgage costs.

It’s worth noting that lenders have begun offering creative financing options to ease the burden of high rates, including temporary buydowns and adjustable-rate mortgages (ARMs) with longer fixed periods. These alternatives can provide short-term relief, though buyers should carefully weigh the risks, particularly with ARMs, which can lead to payment shocks if rates rise further at adjustment periods.

While high interest rates increase earnings on financial items, they also make borrowing significantly more expensive. Not only will mortgage payments grow, but so will payments on personal, business, or auto loans, as well as credit card debt.

The website states: "The disadvantage to higher interest rates is that all loans are more expensive, including credit cards, so it's best to hunker down and keep debt to a minimum."

The debt level of US families is rising across the board, with over $18 trillion expected by the end of 2024. Though housing accounts for the vast majority of outstanding debt, Home Equity Lines of Credit (HELOC), credit card debt, and auto loan debt are all on the rise.

Delinquencies on house loans and credit cards have steadily increased, showing that borrowers are finding it increasingly difficult to repay their housing and credit card debt.
While high interest rates have some advantages, home buyers should consider the mortgage rate and monthly payment they can afford and are comfortable with.