Mortgage interest rates have been on a sled over the past year, scooting down nearly 2 points since last October. Rates have dropped more than a point just since May.
A buyer putting down 20 percent and getting a 30-year, $800,000 mortgage to purchase a $1 million island home in October 2023 would have been saddled with a $5,759 monthly payment.
The same buyer making the same deal this week would owe the bank just $4,900 a month.
But despite the dramatic decline in rates, and big potential savings, Vero Beach real estate agents and homebuilders haven’t seen an equally dramatic uptick in sales – at least not yet.
“It is too soon to judge the impact of these lower rates,” says broker associate Kyle Von Kohorn, sales manager at AMAC Alex MacWilliam, the island’s oldest brokerage. “Rates only hit their low a month or so ago and have ping-ponged a little bit since then, and there are a lot of other factors in play. Sixty or 90 days from now, we’ll have the data to see for sure how lower rates are affecting sales.
“Anecdotally, we do have agents who have seen a small surge in demand, but it is hard to know for sure right now if it’s due to lower interest rates.”
Someone buying a $500,000 house with 20 percent down this week, however, would save $430 monthly compared to last year at this time, with their mortgage payment dropping from $2,879 to $2,450.
Asked if his deal flow is up due to lower rates, Berkshire Hathaway agent Chip Landers says, “Not yet,” a phrase echoed by GHO Homes president Bill Handler, who has hundreds of new homes in the pipeline in multiple subdivisions on the island and mainland.
“Not yet,” Handler says. “Our buyers are not reacting so much to the current lower rates, hoping and expecting them to be lower and more stable after the election. We have patient customers and no one factor is going to impulsively drive a decision as large as purchasing a new home.”
U.S. homebuyers were spoiled by abnormally low mortgage rates for more than 10 years. From 2010 until 2021, rates varied between 3 percent and about 4.5 percent, making cheap money the norm for half a generation.
When the Federal Reserve plunged into a period of rate hikes in March 2022 to slow inflation fueled by pandemic supply chain breakdowns and federal stimulus spending, it threw a wet blanket over the red-hot Covid-era housing market.
In 15 months, the Fed raised the federal funds target rate, which guides mortgage rates, more than 5 points, from 0.25 to 5.5, according to Forbes.
Following in the wake of those increases, the average 30-year mortgage rate climbed from a post-pandemic low of 2.6 percent to 7.8 percent, peaking exactly one year ago.
That rate wasn’t astronomical by historical standards. In fact, it was the exact average for mortgage rates in the U.S. over the prior half century. But it was also a 20-year high and, by comparison, a shock to the system of homebuyers still dreaming of 3 percent.
Mortgage rates near 8 percent put a damper on the market in two ways, making homes less affordable for buyers, while also locking potential sellers with low-interest mortgages in place.
More than half of American homeowners have mortgage rates below 4 percent according to the Federal Housing Finance Agency. Many of those people who would have liked to get a bigger house for a growing family – or to downsize after retirement – didn’t want, or couldn’t afford, to give up their cheap mortgages.
Taking on a loan with an interest rate three or four points higher would’ve added hundreds or even thousands of dollars to their monthly expenses.
Now that rates have dropped into the low sixes, that differential has begun to ease for sellers, and at the same time homes have become more affordable for buyers.
“A lot of buyers have been sidelined by high prices and high interest rates,” says Von Kohorn. “If rates go down enough, those people will be able to afford the house they have been wanting.”
A survey conducted earlier this year found that 15 percent of Americans planned to buy a house when mortgage rates decreased, according to an article published by consumer financial website nerdwallet.com.
Nationwide, mortgage applications jumped as much as 14 percent week-over-week in September in response to lower rates.
Economists expect the Fed to cut its funds rate once or twice more this year and to continue cuts next year as inflation, which has fallen from 9 percent to about 2.4 percent, continues to decline.
In that context, federal housing finance agency Fannie Mae predicts the average mortgage rate will dip to 5.7 next year.
“I think we’ll see mortgage rates start dropping again in November,” says Landers. “Rates will be under six later this year or early next year. If you’re sitting on a 5.5 or 5.75, that is getting closer to those lock-in rates. That will allow more sellers to put their homes on the market and bring out more buyers.”
“The closer you get to 5 percent, the more impact lower rates will have,” says Von Kohorn.
At 5.5 percent that $800,000 mortgage drops to $4,542 per month, down a whopping $1,200 from what it would have cost a year ago.
Despite that potential windfall, Von Kohorn says he advises buyers not to wait for lower rates.
“That is like waiting for something to go on sale at a store. Maybe it does, but then you have to wait and see if there is anything left at the end.
“Right now, buyers have leverage to gain concessions such as improvements to the house or having their closing costs paid, but if a lot more buyers come into the market they will lose that leverage. If rates go down enough, more buyers will be able to afford that house they wanted. Competition will increase and more power will shift back to sellers.”
Landers poses a parallel caution for sellers who are waiting to put their homes on the market.
“It’s a balanced market right now, a good time to list,” he says. “Sellers have leverage because there isn’t an excess of inventory. If rates go low enough to unlock people with those cheap mortgages, and we put another 500 homes on the market, buyers will have more to choose from and can negotiate more. Sellers will have more competition.”
Generally, lower interest rates have less impact on the island, where most buyers pay cash, and greater impact on the mainland where mortgages are more common. But falling rates do have some impact on the island market, according to Von Kohorn.
If a buyer’s portfolio is earning more than the interest they have to pay on a mortgage, the buyer may decide to use the bank’s money to leverage a home purchase, especially since they can deduct the mortgage interest when they file their taxes.
“Some buyers on the island do get mortgages if it fits into their overall financial picture,” Von Kohorn says, adding that he would like to see rates decline gradually going forward.
“If mortgage rates get too low, too fast, it could get us into a problem,” he says. “Slow changes are good changes.”