September 18, 2023
Inflation has a direct influence on how much house you can afford and the methods used to pay for it. The rate of inflation also affects housing availability. Available housing means housing that is available, unoccupied, and reasonably affordable for the potential homebuyer.
Experts may debate the fine details of buying versus selling, but the market during times of inflation can leave the consumer navigating rough waters.
The steadily increasing rate hikes that the Federal Reserve has put into place since March 2022 to combat inflation are a far cry from 2020’s emergency cuts that sent the federal funds target rate at zero to 0.25 percent as a result or COVID. The last quarter-percent Fed hike in July — while small — was part of a 5¼-point increase over the last 18 months or so. What’s more, another quarter-percent increase before year's end is predicted.
With things steadily shifting, knowing how a fixed or flexible mortgage rate payment might fit within your financial means can be the difference between frustration and finding a place to call home.
What Makes Real Estate a Buyer’s or Seller’s Market
The real estate market alternates between favoring buyers and sellers. For example, in the years leading up to the 2008 housing bubble crash, sellers were commanding significant prices. The crash, however, suddenly dumped a slew of foreclosed homes on the market; rapidly shifting the balance to a buyer’s market where homes were available for fire-sale prices. The market remained fairly stagnant and even continued to fall in some areas until 2013, when mortgage rates were dropped to encourage buyers to invest in homeownership.
For years, mortgage rates remained low, and qualified buyers in most parts of the country were able to negotiate attractive deals. The COVID pandemic, however, changed the real estate landscape again as people remained in place and brought the level of available housing on the market to new lows. In response, home prices escalated and have continued to remain high as the number of homes on the market still falls well short of demand.
Buyer’s Market: This describes a market where conditions favor people looking to buy a home over the person selling the home.
- More homes are available on the market, forcing sellers to compete to complete a sale. ○ Homes are priced more competitively, giving buyers more house for the dollar.
- Homes remain on the market longer, allowing buyers more time to compare homes and negotiate sales.
- Buyers can be more selective and request more concessions from sellers like repairs to the home, allowances for changes or additional items to be included in the sale.
- Sellers may drop the home price if the home exceeds a certain number of days on the market.
Seller’s Market: On the flip side, a seller’s market is where conditions favor individuals looking to sell a home over the person buying the home.
- Not enough homes are on the market to meet demand, allowing sellers to command top prices for a sale.
- Home prices are high, yielding more profit for owners. ○ Homes sell quickly or even before they hit the MLS — Multiple Listing Service —f orcing buyers to compete to secure a contract on a home.
- Sellers may decline buyer requests for repairs, home inspections or other financial accommodations.
- Sellers may benefit from bidding wars and escalation clauses to sell above the listed price.
Currently, the real estate market remains a competitive seller’s market simply because housing inventories remain tight. However, while spring and early summer are prime home-shopping months, the market does tend to slow in late summer and fall. Homes may remain on the market longer, and sellers may be more willing to negotiate.
Fixed-Rate Mortgages Versus Adjustable-Rate Mortgages
Home buyers in need of a mortgage typically must choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM). The terms and conditions for each will differ and alter the process of paying off the loan. The two most basic elements of a loan are the term and the interest rate charged.
The term refers to the number of years you will make scheduled payments to pay off the loan — 15 years, 20 years or 30 years is typical. The length of the term usually affects the interest rate you’ll pay on the loan. Shorter terms often come with lower interest rates while longer terms may carry higher interest rates.
The difference in fixed-rate mortgages and ARMs is primarily in how each loan addresses the interest rate applied to the loan:
- Fixed-rate mortgages lock in and apply the same interest rate for the life of the loan. No matter how interest rates shift or change, the interest rate applied to the loan remains unchanged. The only way to change the interest rate or terms is to refinance the loan with a new mortgage. The interest rates for fixed-rate mortgages are usually slightly higher than the initial rates for flexible mortgages.
- Adjustable-rate mortgages (also known as flexible mortgages) adjust or change in accordance with term timelines specified in the mortgage's terms and conditions. As a rule, if interest rates rise, the interest rate applied to the unpaid balance of the mortgage will as well at the timed milestones identified in the loan contract. Likewise, if interest rates fall, the interest rate applied to the unpaid balance of the mortgage may as well at the timed milestones identified in the loan contract. The initial interest rates for ARMs tend to be lower than those for fixed-rate mortgages.
ARMs usually are described with two numbers: the first signifying the introductory period when the interest rate will remain the same and the second dictating how often the interest rate can be adjusted thereafter. For example, a five-one loan would remain at the introductory rate for five years but then adjust each year after that.
The Drawbacks of Adjustable-Rate Mortgages
Having an ARM with a flexible mortgage rate comes with some conditions in which potential borrowers need to be aware:
- If interest rates rise, the interest rate applied to your loan will also increase and in turn increase your monthly mortgage payment.
- Some ARMs have floors limiting how low they can go if interest rates fall. Some contracts may not allow for downward adjustment at all.
- The terms, conditions and other specifications associated with ARMs vary from mortgage contract to mortgage contract.
Individuals considering taking out an ARM need to fully understand the timeframes, conditions and obligations specified in their individual contract and how those work with their current budgetary constraints and their future plans.
The Pros of Adjustable-Rate Mortgages
Having an ARM with a flexible mortgage rate can also come with some conditions that may prove advantageous to potential borrowers:
- If interest rates fall, the interest rate applied to your loan may also decrease and in turn decrease your monthly mortgage payment.
- Some ARMs have ceilings or caps limiting how high they can go even if market interest rates continue to rise.
- Loans typically have an introductory period of three, five, seven or even 10 years that keeps the interest rate fixed for that timeframe. For people planning to move before then, the comparatively low introductory interest rate can be a money-saving option.
- When buyers feel that conditions may eventually improve, they may opt for an ARM to take advantage of the lowest possible interest rates currently available while either hoping for interest rates to eventually fall or intending to refinance the loan when conditions improve.
For individuals who want to be able to purchase a home in a tight real estate market, an ARM may provide a financial foot in the door to long-term homeownership.
Plan Your Path to Homeownership at La Capitol
The most important factor of choosing an ARM is determining which financial institution will give you the best terms and conditions for the money.
Credit unions are noted for offering their members the very best terms, conditions, and interest rates available. La Capitol Federal Credit Union is no exception. Here, you’ll find a team of home loan specialists that can help you get the best mortgage options for your needs.
Reach out, and let us show you a way to homeownership that works with where you are now—and where you want to be.
Visit our Mortgage Center or contact one of our Mortgage Loan Originators.