Becoming a homeowner isn’t getting any easier. According to new research by the National Association of Realtors, the median age of a first-time homebuyer in now 38 years old. That’s up from 35 years old in 2023- and 29-years old back in the 1980s.
Why the growing delay? The answer could be attributed to many reasons: Rising home costs, lack of supply, stagnant buyer incomes, etc. However, one could argue that perhaps the most significant factor is the cost of the housing payment itself – a number which is greatly influenced by our current environment of high mortgage rates.
Recall that with a standard fixed-rate conventional mortgage, the principal and interest (P&I) portion of the payment is made up of two components:
· The amount of money being borrowed
· The interest rate assigned to the loan by the lender
As these mortgage rates have gone up since 2022, it’s dealt a major blow to consumers who struggle to afford the new payments.
To put this in perspective, a study by Bankrate found that the typical monthly mortgage payment rose from $1,100 in 2020 to $2,207 in 2024. Even though some of that increase may be attributed to a higher selling price, the bigger culprit was interest rates going from 3% to 7%.
That was all supposed to change in 2024 when the Federal Reserve, our nation’s central bank, announced it would begin scaling back interest rates. However, despite reducing the Fed Funds rate by 100 basis points (i.e., a full percentage point) since last year, mortgage rates have remained stubbornly high.
So why is this happening, and when will there be some relief for home buyers?
Mortgage Rates and the Federal Funds Rate
To better understand the situation, it’ll be useful to first look at how the Fed and the mortgage industry are connected.
Typically, when the Fed sets a new Fed Funds rate range, there’s generally an immediate impact on short-term interest rates. This is because banks will adjust the prime rate (i.e., a benchmark used throughout the banking industry) to scale out rates on products you probably use all the time: savings accounts, credit cards, personal loans, etc.
There is also an impact on longer-term debt such as mortgages. However, because these loans have longer terms by nature, their rates tend to be more closely aligned with the 10-year government bond yield.
Bond interest rates (known as the “coupon rate”) are determined by the U.S. Treasury. Yet, a bond’s yield is a factor of both the interest rate and the price someone is willing to pay. Therefore, as the Treasury sells these bonds at auction, good old economics (supply and demand) determines the resulting yield.
Factors That Influence Treasury Yields
The buying and selling of 10-Year Treasury bonds can be swayed by several factors in the economy:
· The Federal Funds Rate – Even though the Fed sets the tone for short-term interest rates, the long-term rates set by the Treasury still need to be somewhat aligned. Otherwise, new bonds won’t be as attractive to potential buyers.
· Inflation – Any time inflation goes up, investors demand higher yields on new bonds to compensate for this erosion of purchasing power. That drives down the prices of existing bonds and increases their yields.
· Economic growth – Though you may not feel it, the economy has been on an up-trend for the past few years. While that’s good news, it means investors will pass up Treasuries for more lucrative assets. That drives prices down and yields up.
· The Federal Reserve Balance Sheet – This one isn’t quite as well understood by the public, but it’s certainly very important. Over the past two decades, the Fed has more or less “rescued” the economy on multiple occasions by injecting money into it through a process called QE or Quantitative Easing. Essentially, they buy up treasury bonds to create a sense of demand and provide stability to the bond markets. However, when the Fed reverses this process (through Quantitative Tightening), as they have since 2022, Treasury prices tend to fall, making the yields go up.
Therefore, as long as uncertainty remains in the economy and Treasury yields remain high, you can expect mortgage rates to also remain stubbornly elevated.
Will Mortgage Rates Ever Go Down?
In short, eventually yes. In 2024, when the Fed announced it would start reducing interest rates, there was an overall feeling among economists that Treasuries would also follow as well as mortgage rates. However, given the recent turbulence with tariffs, no one is really sure anymore.
For the time being, here is what a few leading groups are forecasting:
· Fannie Mae – Expects the 30-year, fixed-rate mortgage to average 6.5% in 2025 and 6.2% in 2026
· National Association of Home Builders – Forecasting that mortgage rates will be approximately 6.5% by the end of the year and begin to fall below a 6% level by the end of 2026.
· National Association of Realtors – 6% with the Federal Reserve rate cuts and calmer inflation
As far as ever getting back down to the 3% range that many people took advantage of during the COVID pandemic era, this is highly unlikely. Interest rates were drastically and artificially reduced at that time to help stabilize a parallelized economy. Therefore, unless there’s another seismic event like that again (and let’s hope not), rates will be more likely to stay closer to where they are today.
What You Can Do to Buy a Home
With seemingly no help from the economy, what can someone do to buy a home? The only thing you can do: Take matters in your own hands!
Try the following:
· Put your expectations in check – Forget what you see on TV and social media. Most people don’t have half a million dollars to spend on a home. Shop for something that’s more reasonable and within your budget.
· Save aggressively – Buying a home is going to require a down payment, preferably 20% or more if you’d like to avoid having to pay mortgage insurance (PMI) every month. Therefore, start saving up now. Even if you’re only half serious about getting a house, the more you accumulate for the time being, the better your head start will be.
· Keep up your credit score – A big part of getting approved for a loan, as well as qualifying for the best interest rate possible, is to have an excellent credit score (also called a FICO Score). The closer your score is to 850, the better. Most major credit cards will have a feature in their dashboard that tells you what your score is, as well as gives you some general advice on how to improve it.
· Get pre-approved – Establishing a relationship with a lender sooner rather than later is helpful in many ways. You’ll know for sure how much a lender is willing to give you and what your estimated mortgage payments will be. Plus, you’ll have one less (major) roadblock in your way when the time comes to make your move.
· Explore other alternatives – Not all homes are bought with conventional mortgages. FHA (Federal Housing Administration) loans will allow for lower down payments and are generally more lenient on credit scores. There are also VA loans if you or a family member is affiliated with the military, and USDA loans for those moving to certain rural communities.
· Be patient – Buying a home is a major purchase with a lot of caveats. Sometimes you just have to wait on the right one at the right price to come along.
It may seem like the world is working against you when it comes to home ownership. But don’t give up hope! Stay consistent and committed to your plan, and before long, a little slice of land somewhere will be yours.
Photo credit: Unsplash
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