With inflation taking over headlines and interest rates on the rise — recently reaching its highest levels since March 2020 — we caught up with etco Homes’ preferred lender with Wells Fargo, Gary May, for an in-depth interview on everything today’s home buyer needs to know, from the benefits of buying over renting to vital guidance for first-time buyers. His top piece of advice? Don’t wait — buy now. See why, below.
What do we need to know about today’s interest rates?
It is very likely we have seen the bottom of mortgage interest rates. Interest rates for mortgages are on an increasing trend, and likely to continue to increase through 2022.
The average 30-year fixed mortgage rate jumped up this week, to 3.64% — the highest it’s been since March 2020. What are the factors that contributed to this increase?
Mainly inflation and the fact that the Federal Reserve will be tapering its purchasing of mortgage-backed securities for the last six years, which has kept liquidity in the market, keeping rates extremely low. Supply and demand in the housing industry (or lack of supply) does not play a major factor with interest rates; it’s purely an effect of the Fed and the amount of liquidity they have been pumping into the system.
Will rates continue to increase in 2022? What can we expect?
Very likely yes. The average 30 yr fixed jumbo loan today is 3.125% (3.155% APR) and could likely go to 3.50% by the end of the year. The vast majority of mortgages that buyers of etco Homes seek is jumbo financing, not conforming loans (which are the type that the Fed is purchasing).
Considering predictions for raised rates, what tips would you give homebuyers now?
Don’t wait! Inventory is not likely to get any better for the foreseeable future, so demand will remain high for the low inventory that is in the market, and rates are highly likely to continue on this upward trend, making the homes that are available to purchase more expensive for the consumer.
What is the best overall advice would you give today’s homebuyers in L.A.?
Don’t wait! I speak with too many buyers who are waiting for prices to come down for a myriad of reasons. Two, three years later, many of them are still waiting on the sidelines and still watching prices go up. Real estate in the Los Angeles area, and particularly in the areas that etco Homes builds, are always going to be in high demand. And with less and less available land to build new homes on, the opportunity to purchase a new home in these desirable areas is becoming scarcer. From the time records have been kept on return-on-investment comparisons between real estate and the stock market, real estate returns have been greater than stock market returns over the long term.
What home-buying trends are you seeing in today’s market? In California?
New homes are more and more in higher demand. Higher-end finishes, top-quality construction are a must, especially in higher-value markets like L.A. More people are working from home now, so comfortable office space has become a must; people don’t want to work from the kitchen table any longer.
What types of mortgages are trending in today’s market?
Due to the high cost of real estate in the areas we work in, 30 yr fixed jumbo financing is predominantly the choice of buyers.
What do we need to know about today’s down-payment options for homebuyers?
Wells Fargo offers jumbo financing for loan amounts above $680k, which affords customers lower rates than the current conforming loan limits in L.A. and Orange County of $970k. If buyers have less than 10% to put down, they can still buy a $1,020,000 home (5% down option). We can also offer 10% down up to $1.65M purchase price dispelling the fact you have to have 20% down to buy a home.
How do rates vary if financing as a primary residence vs pied-a-terre/second home?
At Wells Fargo, these rates are the same. There might be a slightly higher down payment requirement for second homes at certain price points, usually, 5% more down, but no adverse effect on rate.
How do rates vary for different type/sized homes, such as condos vs single-family homes?
This depends on the size of the loan; with Wells Fargo jumbo financing, the rate is the same for a condo as it is for a single-family home, a huge benefit for buyers. For conforming loans, there is a big difference in interest rates and it is very dependent on the amount of down payment for the loan to value calculation (LTV). Conforming loans have different pricing tiers based on LTV, but as a general rule, think .25% higher rate for condo.
Can you share insight on being a cash buyer vs. financing?
“Cash is king” has been a focus for listing agents for many years. The one major upside for cash buyers is the ease at which they can close on a purchase; they don’t need condo project review, no appraisal, lower closing costs from the title company.
There are quite a few downsides to this: Unless you are super wealthy and don’t need the cash, you are tying up a huge amount of assets that cannot be leveraged. Gaining access to the equity after closing can be expensive and very time-consuming; using an equity line as a vehicle to access the equity is more expensive than a regular mortgage. And the amount is limited that you can access. Interest rates on equity lines are higher than regular 1st mortgages, and the rate is ‘floating’ with the market. When the Fed raises rates, the equity line interest rate increases immediately. Cash buyers are not always the best offer; it has been my experience in multiple offer situations that the cash buyers are looking for a ‘deal’ and generally offer less than the listing price, using the benefit of being able to close faster than a financed buyer. Not all cash offers get accepted over financing offers.
What economic indicators should buyers be monitoring?
A simple and good rule of thumb is to watch the 10 yr T-Note rate. At the very low, the 10 yr was below 1% yield and interest rates for jumbo mortgages were 2.75% and even lower for 30 yr fixed loans. The 10 yr is at 1.8% today and rates are 3.125%. It is expected that the 10 yr will be at 2% or higher before the end of the year, making jumbo financing likely to be 3.5% on average. Conforming loans will likely be closer to 4.00%.
In today’s real estate market, many potential homebuyers contemplate whether they should continue renting or take the leap to homeownership. What are the factors they should consider when making this decision?
When you rent, you are paying someone else’s mortgage. If you have the means to save for a down payment, buying can be a smart decision financially because now you are investing in yourself, and as properties appreciate in value and the mortgage is paid down, as an owner, you receive 100% of the benefit. As a renter, when you move out, you have nothing to show for the rent payments you have made.
What is the benefit of buying over renting?
As a renter, you can almost guarantee the one thing to look forward to is rent increases each year (typical for L.A. area has been 3-10% a year depending on area). As an owner, your mortgage payment doesn’t change, and each time you make a payment, you are effectively saving money in the form of equity that is all yours to keep if and when you move and sell. There are some tax benefits as well; please consult with your CPA on these.
What are the first steps one should take when seeking a new home?
GET YOUR FINANCING IN ORDER. Too many times I see buyers looking at homes that they cannot afford to purchase. Buyers should get a loan application put together with someone that can look at income documentation to determine with confidence, what the maximum amount is they can qualify for.
What is your best advice for a first-time homebuyer in today’s market?
Ask lots of questions. The information on the internet is very vague. Every buyer situation is unique, so connect with a trusted lender who will take the time to review your personal situation, then provide options and solutions that fit their needs financially. Just because you can qualify for a mortgage, doesn’t always mean you should get one.
Have additional questions for Gary May? Please feel free to reach out to Gary directly by calling 310.808.8453 or emailing Gary@wellsfargo.com.