Mortgage rates have fallen to their lowest level in more than a year. But is it a good time to buy a home as recession fears rise? Not necessarily, says one expert.
“A lot of people want to jump in as 30-year rates come down, but at the end of the day we still have a housing market that is too high as a whole,” Todd Stankiewicz, a certified financial planner and president and chief investment officer of Sykon Capital in Harrison, New York, told MarketWatch.
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With home prices still at record highs and the average price of a home approaching $400,000, buyers shouldn’t let the direction of mortgage rates sway them in their decision to buy a home, he said. “Don’t try to buy it because it’s a good deal. Don’t try to rush it because rates have dropped. You have to be patient,” Stankiewicz said.
His warning comes at a time when markets are in turmoil.
Global stock markets are falling as investors see July’s weak jobs report as a sign that a widely recognized indicator called the Sahm rule has kicked in. This indicator signals that the U.S. economy may be heading into a recession.
The rule is named after Claudia Sahm, but the economist said she hasn’t seen enough evidence yet that a recession is a certainty. “We’re not in a recession now,” Sahm told CNBC, “but the momentum is moving in that direction … a recession is not inevitable and there is substantial room to cut rates.”
30-year yield falls to lowest level since April 2023
Because mortgage rates are influenced by market expectations, the Federal Reserve is likely to cut rates as the economy slows, which is why the 30-year yield has fallen in the past week.
The 30-year yield initially fell after the Fed on Wednesday outlined a September rate cut, then fell again after Friday’s jobs report. On Thursday, the average 30-year yield stood at 6.48%, the lowest level since May 2023, according to data from Intercontinental Exchange.
The 30-year fixed-rate mortgage fell further Monday to 6.34%, the lowest level since April 2023, according to Mortgage News Daily, which surveys lenders daily.
“We could see further rate cuts if the [economic] “Data continues to support the narrative of a weakening economy, but today’s data offered no additional support,” Ralph McLaughlin, a senior economist at Realtor.com, told MarketWatch. The service side of the economy rebounded in July, countering recession rumors.
(Realtor.com is operated by News Corp subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, which is also a subsidiary of News Corp.)
Required income to purchase a $400,000 home at current mortgage rates
Still, a drop in rates is a big development for many buyers, as housing affordability has deteriorated significantly in recent years. In May, home affordability fell 7% from a year earlier, as measured by the Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor.
According to the Atlanta Fed, purchasing the average $383,000 home in May on an annual salary of $81,000 would consume 44% of a household’s income, which is considered a financial burden.
According to calculations by Realtor.com, a homebuyer who wants to comfortably purchase a home with an average asking price of around $440,000 in July would need to earn an annual income of $90,000.
The calculations assume that the buyer’s monthly housing payment would be just one-third of their income. Their monthly housing costs would be around $2,500, assuming a 20% down payment, a 30-year interest rate of 6.3%, as well as taxes and insurance.
“An economic recession is certainly not necessarily bad news for buyers,” McLaughlin said, based on a 2023 survey of website visitors.
About 36 percent of buyers said they would be more likely to buy a home because of a recession, McLaughlin said. Among first-time homebuyers, that percentage is even higher: 42 percent, and among repeat homebuyers, 32 percent.
And if the U.S. economy enters a recession and a buyer’s income is unaffected and “relatively safe,” he added, “a recession could bring benefits to homebuyers, such as increased supply, lower interest rates and a slower-moving market.”
But buying a home should also be a decision based on one’s finances and risk tolerance, with an emphasis on whether one can afford the mortgage or get a good interest rate or price, Mark Palim, deputy chief economist at Fannie Mae, told MarketWatch.
“I really wouldn’t try to time the market,” he added. “I wouldn’t try to time house prices or rates. I would look at my personal budget, my personal circumstances… [and if] You are comfortable enough to weather whatever happens in the economy.”
Stankiewicz also advised homebuyers to consider long-term needs and different scenarios. “What people ultimately need to focus on is, is the house right for them? Is it right for their family and do they see themselves living there for seven to 10 years?” Stankiewicz said. “Is it right for their financial situation in the future?”
Low housing stock still a problem in some parts of the country
According to Fannie Mae’s Palim, lower mortgage rates could also lead to more housing inventory across the country.
Higher interest rates discourage homeowners from moving, especially those with extremely low mortgage rates. A move could mean having to take out financing at double the interest rate they have now.
Consider this: For a homeowner who still has an outstanding balance of $200,000 and a 3.5% interest rate on his mortgage, buying a home of equal value at a new interest rate of 7% would mean his monthly payment would increase by 38%, which would amount to $110,000 over the remaining life of the loan, according to a working paper titled “Household Mobility and Mortgage Rate Lock,” released Monday by the National Bureau of Economic Research.
That “creates a large disincentive to move,” the researchers added. Higher interest rates prevented about 800,000 moves between the third quarter of 2022 and the second quarter of 2023, the researchers found. “For households that moved between July 2022 and June 2023, the average interest rate differential was about 2.7 percentage points, equivalent to a difference in annual payments of $4,928,” they wrote.
As homeowners stay put, the inventory of homes for sale has remained low in many parts of the U.S. The housing inventory is 32% below its pre-pandemic average, with “stubbornly low” levels in the Northeast, according to a monthly report from ICE.
‘Fixed on the American Dream’ vs. Weighing the Costs of Home Ownership
Homebuyers eager for lower rates should also be aware of the rising costs of owning a property. Homeowners are particularly challenged by the cost of utilities, including electricity, gas, water and sewer, as well as homeowners insurance and property taxes, according to a recent survey by Fannie Mae.
Prospective homeowners should factor those costs into their considerations before committing to a home, Stankiewicz said. “People get so fixated on the American Dream, owning a home,” he said. But they sometimes ignore “the other costs that come with it,” he added.
So even though mortgage rates are falling and people may feel compelled to buy now rather than wait until they can afford it, they shouldn’t “get too caught up in it,” Stankiewicz added, and “buy a house that’s not a good fit for them at the wrong time.”
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