New Haven Register (New Haven, CT)
Rising mortgage interest rates in CT are affecting buying power, experts say
Low housing inventory and sky-high sale prices have been hallmarks of the real estate market spawned by the COVID-19 pandemic in Connecticut. And for much of the past two years, low mortgage interest rates have also been a trait of the market.
According to national mortgage lender Freddie Mac, 30-year fixedrate mortgages had an average interest rate of 3.45 percent in March 2020, approximately the time the pandemic began. By December of the same year, that interest rate dropped to an average 2.68 percent. While interest rates fluctuated between 2.74 percent and 3.08 percent throughout 2021, those average rates have become a thing of the past in 2022, according to Freddie Mac data.
Average interest rates in January hovered at 3.45 percent, and climbed to 3.76 percent in February. By the end of March, 30-year fixed rate mortgages had an average interest rate of 4.67 percent, according to Freddie Mac. As of April 5, the average interest rate for such mortgages sit just under 5 percent at 4.85.
With interest rates on the rise, buyers might be finding themselves in tighter homebuying circumstances than they've already experienced from competition and lack of inventory. According to Andrea Viscuso, a real estate agent with Compass' Forte Team, these fluctuating interest rates might change what a buyer might be willing to spend on a home, especially if they've been house hunting for a while.
“It really just affects their buying power on the purchase price unfortunately,” she said before offering an example scenario. “Let's say $700,000 at a rate of 3.5 percent for instance will have a monthly payment of X. But $700,000 at a rate of 4.5 percent will be Y. For some people, that might be a minimal difference of maybe $300, but if I have buyers who only want to spend a maximum of $2,800 or $3,000 a month in their mortgage payment, and that [increase] puts them at $3,300 or something, now they can only afford $650,000.”
While Viscuso acknowledges that mortgage interest rates have increased since this time last year, rates have always been “a little wavy,” and they aren't yet affecting buyer behavior.
“Buyers are not going to make an uneducated purchase or buy something they don't love, so all of that still outweighs that push or incentive to buy because of the rates,” she said. “The rates are still low — I've been doing this long enough to know that they're still low overall. I've been a realtor for seven years now, and seven years ago when I was working — even six, five years ago — those rates were in the fours and fives, so people buy and sell all the time. It's really about whatever's a driver for your family.”
Viscuso recommends buyers find a mortgage broker like the one she partners with who will continuously monitor rates to ensure that the buyer gets as low a rate as possible by the time they purchase a house.
“Say I get an accepted offer today, and I lock in, [the broker I use] will keep shopping my rate,” she said. “So let's say in three weeks, rates have a dip for some reason, [the broker] will get out of that lock and re-lock me.”
Having a broker continually hunt for the lowest possible interest rate is different than signing on for a mortgage with a variable interest rate, also known as an adjustable-rate or ARM mortgage. ARM mortgages are loans for home purchases with an interest rate that adjusts over time based on changes in the market, according to mortgage company Rocket Mortgage. These loans “typically start with a lower interest rate than fixed-rate mortgages,” according to Rocket Mortgage, but the initial rate can and will fluctuate past the preliminary period. While there are different types of fixed and adjustable-rate mortgages with varying terms, Viscuso said every buyer should work with their broker to determine what's best for their situation.
“Some mortgages like ARM have interest rates that stay exactly the same for five years or seven years or whatever it is,” she said. “If you're not planning on living in a house for longer than that because maybe it's small or something like that, maybe get [an ARM] if you're going to sell it by the time the ARM changes over…. people are doing whatever works for their situation, and that's why you need to have a solid mortgage broker behind you who is a little creative and can come up with ways to help you either borrow the lowest at the smallest amount as far as fees and rates, or work with you [on another approach].”
As the interest rate steadily climbs and buyers purchase all kinds of properties, John Glascock, director of UConn's Center for Real Estate and Urban Economic Studies, said that Connecticut residents might be more affected by rising interest rates long term over other parts of the country, as the state's housing prices have not kept up with inflation.
“They'd get what economists call the price effect of higher rates and not get the gain on their house,” he said in an email. “Whereas it's likely that a Nashville new buyer will get gains from the higher prices on house over time and that compensates for the interest rate increase.”
While the real estate market, its prices and inventory would adjust in “typical times” based on a number of economic and market factors, Glascock noted this adjustment might not occur since “much of this upward cycle is from lack of supply.”
To Glascock, mortgage costs are still low when inflation is subtracted from the mortgage rate. While rising interest rates will hinder people's ability to buy, he said the “key problem” the market faces right now is the shortage of housing.
“There was a shift away from multiple-family housing from rentals to condos towards singlefamily housing during COVID — this has stuck to some extent,” he said. “Additionally, people are moving from older transport and manufacturing cities towards white-collar and college-educated cities, where there is just not enough housing being built.”
In Connecticut, there was a marked uptick in the purchase of condos in 2021 as buyers either looked to downsize, own property with less upkeep or have a second residence. Couple that with the competition for single family houses, and Glascock said that this shortage of housing has buyers “unable to get the house they want, and they are bidding above list price in many parts of the country.”
Cash buyers also help drive prices up, Glascock noted, and with prices increasing as buyers outbid each other, there is a “shortage of houses to buy and good apartments to rent — a real supply problem.”
The issue this creates for home buyers beyond the lack of inventory to shop is that the interest rates can change with each week that they don't secure a house. It's something Viscuso said both casual shoppers and those seeking a particular kind of property are up against, especially if they don't view houses every single week.
"The rates could change [in that time]," she said. "So maybe the last time we offered on a house was three weeks ago, and we were running numbers on that one, now we have to run numbers on this new one that we may find three weeks later. We have to touch base with a mortgage broker and ask for today's rate because they're that volatile."
One way Viscuso recommends buyers stay ahead of factors affecting the total price of a home is to think of their budget as having two parts: one is the price of the house in its current state, the other is to take into account any renovations it might take to make it suit their needs.
“You think of a $500,000 house, everything is great but you hate the kitchen — now your purchase price on the house is $500,000 plus a new kitchen,” she said. “So you think, ‘Do we have the funds to make that happen? Do we need to go in a bit uniquely as far as rolling your closing costs into the loan so you save the cash to help you redo the kitchen?' You have to be a bit creative to help fund the entire purchase.”