Right now there’s a lot of pessimism about the state of the U.S. economy. This is understandable given the effects of COVID-19; these include the overall unemployment rate, countless small business closures, and other discouraging signs.
However, there is one group of Americans who are benefitting from present uncertainty: homebuyers.
For the week ending June 18, Freddie Mac reported that the interest rate on an average 30-year fixed-rate mortgage fell to an historic low of 3.13%. The previous record low was 3.15% for the last week of May this year. Meanwhile, the average 30-year fixed-rate mortgage for the week ending June 21, 2019 clocked in at 3.84%.
In short, there has never been a better time to buy a home.
Why Mortgage Rates Are So Low
To give you some context, U.S. mortgage rates tend to follow the interest rates set by the U.S. Federal Reserve (a.k.a. “the Fed”). The Fed acted quickly to prop up the economy at the beginning of the COVID outbreak. On March 3rd, rates dropped to 1.25%, and then dropped again to 0.25% — or effectively zero — on March 15th.
Why did they take this action? Simply put, lower interest rates help stimulate the economy. This happens in two ways (as this helpful video explains):
- Low interest rates make it cheaper for people to borrow money for big purchases.
- Low interest rates mean savings accounts become a less desirable place to keep your money, encouraging spending.
In other words, the Fed and lenders down the food chain are trying to encourage people to save less and spend more, especially on larger expenses like buying a home.
How Much You Could Save Right Now
Let’s say you want to buy a $1M property, with a standard 20% ($200K) down payment. This means your mortgage balance would be $800K. Here’s how much you could save by buying right now:
- Buying Now: If you had gotten pre-approved for an average 30-year fixed-rate mortgage in May 2020, your interest rate would be 3.23%. Your monthly payment would be $3,473, which would cost $1,250,235 over the lifetime of your mortgage.
- Buying A Year Ago: Now let’s say you had done the same thing 12 months ago. In May 2019, if you had gotten pre-approved for that same mortgage — at a 4.07% interest rate (the then-average for a 30-year fixed) — your monthly payment would have been $3,852, with a total cost of $1,386,604.
That means that for the same value property, you would have saved $379 a month and $136,369 over the 30-year period(!), just by buying in May 2020 compared to May 2019.
So what makes this the year for you to buy a home?
Why This Is The Right Time To Get A Mortgage
Economic forecasting always carries some risk. Even though buying at historic lows is an amazing opportunity, we don’t know exactly what will happen in the future, which means we don’t know where interest rates will go.
However, there are three main reasons to expect mortgage interest rates will not continue to fall.
First, when asked about further measures to stimulate the U.S. economy last month, Fed Chairman Jerome Powell told reporters that he did not see negative interest rates as “an appropriate policy response”. Because Fed interest rates are already at 0.25%, it is unlikely they (or mortgage interest rates) will drop further.
Secondly, this week we heard some good news. In Congressional testimony on Tuesday, Dr. Anthony Fauci told lawmakers that he now expects a full vaccine by late 2020 or early 2021. This update is hugely encouraging in the fight against the pandemic, which has been the primary driver of the economic shutdown. With a COVID-19 vaccine in place and administered widely, we will be able to reopen the remaining closed sectors of our economy. And as the economy recovers, we expect the Fed will opt instead to raise interest rates again.
Finally, we are already seeing signs of a recovery in the housing market, both in the Bay Area and nationwide. While this is great for the economy, it will make conditions for homebuyers far less favorable in the near term. Many mortgage lenders we work with are now raising their rates to keep up with surging demand, and this shows no signs of slowing.
As such, we advise buyers to act quickly!
The Bottom Line
Mosaik Real Estate is particularly well-equipped to serve homebuyers. We have five buyer’s agents on our team covering the entire San Francisco Bay Area, as well as close relationships with some of the area’s most competitive mortgage lenders.
Whether you’re looking to buy your first home or your tenth, we hope you’ll take advantage of this moment and get in touch.
Here’s where you can schedule an appointment with us.