February 18, 2025 – Getting Used to Higher Rates

Economic Commentary

There is no doubt about the fact that higher interest rates are putting a cap on potential growth in the real estate market.  Together with high housing prices, affordability has certainly been a major factor within the sector for a few years now. While you can understand market analysts and participants in the industry rooting for interest rates to decrease, you don’t see many calls for home prices to fall. Those who own real estate are really happy that prices are higher, unless they are in the market to sell and purchase another home using financing.

As a matter of fact, we have been talking about the lock-in effect of today’s owners for some time now. That is, owners who want to sell but won’t because of higher interest rates and/or home prices. If you own a home with a 3.0% mortgage, one can understand the disincentive to purchase another when rates are at 6-7%.  But over time, these disincentives are fading even without rates coming down. Why? There are several reasons, including the fact that higher rates are becoming old news. The shock factor has faded. At the beginning of this cycle, most everyone was predicting a quick return to lower mortgage rates. Not as low as three percent, but lower than today’s rates.

Another reason?  Life goes on.  People take jobs in other cities.  Their households grow or shrink. They need to move closer to family or to a retirement location. As life goes on, the number of owners who have completely paid off their mortgage or have a mortgage higher than 5.0% grows.  This category accounts for well over 50% of owners and grows every month.  Thus, the lock-in effect wanes over time due to these factors. Finally, the hope that interest rates will fall has faded somewhat, but it has not disappeared.  It has just moved down the road a piece.

Weekly Interest Rate Overview

The Markets. The Freddie Mac rate survey indicated that mortgage rates were slightly lower in the past week, though there was much volatility after the inflation reports were released. According to the survey, 30-year fixed rates decreased to 6.87% from 6.89% the week before. In addition, 15-year loans rose to 6.09%. A year ago, 30-year fixed rates averaged 6.77%, 0.10% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate mortgage continued to inch down this week, reaching its lowest level thus far in 2025. Recent mortgage rate stability is helping potential buyers, as purchase demand is stronger than this time last year. This is an indication that a thaw in buyer activity could be on the horizon.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes

Real Estate News

Down payment assistance programs remain underutilized, despite high eligibility among government borrowers.  Down payment assistance (DPA) is an important tool for helping to qualify borrowers who struggle to raise enough money for a down payment when buying a home. That’s especially true in the government’s FHA-insured loan program, designed to assist home buyers who aren’t likely to pass muster for conventional financing.  According to the latest quarterly report to Congress from the U.S. Department of Housing and Urban Development (HUD) on the Federal Housing Administration’s Single-Family Mutual Mortgage Insurance Fund, only 58.46% of the loans the agency endorsed were originated without the borrower receiving help for a down payment. That means more than two in five FHA-mortgages came with some form of DPA. Of those who received some form of DPA, nearly 19% of that aid came from governmental entities, according to a chart buried deep in the report. Relatives pitched in to help 21.5% of the borrowers. But less than 1% came from other sources such as employers. But here’s the rub. According to the Urban Institute, a lot more people could have used down payment assistance if they were aware of it. An October 2023 Urban Institute study, conducted in collaboration with Down Payment Resource (DPR), found that in the country’s 10 largest metro areas, nearly 83% of all first-time FHA borrowers would have qualified for help with their down payments.  “Think of all the buyers who were turned away from their initial meeting with a loan officer because they didn’t have enough money for a down payment,” DPR’s Rob Chrane told NMP. “There has to be a huge gap between the borrowers who received some sort of help with their down payments and those who could have gotten help had they known it was available.”   Source: Lew Sichelman for National Mortgage Professional

Point2 conducted a survey of renters of single-family homes, finding that privacy and space are among the top motivators–but the comfort of their furry friends also ranks high. Single-family renter households pointed to “more privacy” as their top reason for renting a house instead of an apartment, at 27.7%. Rounding out the top five answers were “for more space,” “to have a yard or garden,” “better pet accommodations” and “to accommodate a growing family.” There was also “house size,” at 28.1%, “pet policy” at 23.2%, “condition of the house” at 20.2% and “proximity to work or school” at 16%. Many single-family household renters are happy with their current rental, at 59.2%, and 27.4% are neutral. A relatively small number–13.4%–are not satisfied. They also don’t view it as a permanent substitute to home ownership–with 51.9% considering buying a house. Looking at Gen Z renters, 28% rent with their significant others, but 23% rent alone–marking the second-highest share of solo renters after seniors over 60. Gen Z renters of single-family homes particularly point to privacy as a motivating factor, with 33.3% compared with 27.7% overall. In addition, 44% said eco-friendliness is important to them in their rental choice. Source: The Mortgage Bankers Association

According to NerdWallet’s 2025 Home Buyer Report, despite tough times, 15% of Americans say they plan to purchase a home in the next 12 months. This illustrates both the pent-up demand brought on by difficult conditions of the past few years and continued optimism among prospective buyers.  Key findings of the report include:

• Pent-up demand during a tough market may lead to 2025 hopefulness. More Americans (15% of them) say they plan to buy in the next 12 months than in previous years, and they hope to spend $259,088 on average — well under the national median sales price.
• Many home-buying hopefuls are taking action, but it may not be enough. More than half (54%) of prospective buyers say they’ve begun looking at homes on listing apps, but just 35% have started a down payment fund.
• Just 28% of Americans who began 2024 with the intention of buying were successful at the time of our survey.
• Obstacles to buying are different for nonhomeowners and homeowners. Among nonhomeowners, the top factor preventing them from buying a home right now is that the cost of living has gotten too high (35%). For current homeowners, the most common roadblock for buying a new home is high mortgage rates (23%).
• Every year, our annual Home Buyer Report signals optimism in the share of people hoping to buy homes. But this year marks the highest share of Americans (15%) planning to buy since we began asking in 2019 — 9% said they planned to buy in that year’s report, 10% in the 2022 study and 11% each in the 2020, 2021 and 2023 studies. Source: NerdWallet