The housing market is in a strange place right now. Interest rates for 30-year fixed mortgages are below 3%. This is good news for potential homebuyers since lower interest rates translate to paying less in interest on their home loans over time. On the other hand, the current home shortage tends to favor sellers, who can expect to get the list price or maybe more should buyers get into a bidding war. This odd mix of low interest rates, high demand and short supply have combined to drive up home prices, especially in five U.S. states.
A recent report by CoreLogic provides a general overview of national home prices. The big takeaway? Prices are going up, but not for much longer. Perhaps the more interesting piece is looking at the five states where home prices have risen the fastest in the past year:
Surprised? One might expect to see California, Texas or New York in the top five. However, there are specific reasons why states like Idaho on Montana are at the top and why it could be the right time to buy given current low interest rates.
Why these states?
“Almost all of these states have an all-time low in inventory,” said Greg Bond, president & owner of Orlando-based Renovation 320. “As supply decreases, demand goes up and prices rise.” Okay, this is a good start, but we need to dig deeper to understand why supply is so low.
[Read: The Best Mortgage Rates of 2020]
Finding answers is as easy as looking at local newspapers in these areas. For example, according to an article on the Idaho Statesman, new construction is down in the area compared to this time last year. While a story in The Missoulian shows the same is true in neighboring Montana. So, we’ve got two pieces of the puzzle, but there’s more.“In recent years, these states have seen a surge in people moving to them,” said the Director of Agent Relations for Veterans United Realty Jake Kraft. “As a result, home prices have increased as more buyers are competing for fewer properties.”
Things are fitting together quite nicely, but there’s still one more piece — the pandemic. High prices and limited supply are nothing new. The one sizable change has been COVID-19 and its impact. The pandemic caused many homeowners and contractors to rethink their plans. The shutdown orders served as a giant pause button that temporarily froze the market. The thaw has started. But there’s still a great deal of uncertainty as owners and contractors decide whether to sell or build.
If home prices are high, why are mortgage rates so low?
Mortgage rates have been low for a while. However, the current drop in rates can arguably be attributed to the pandemic. The Federal Reserve’s recent decision to buy up mortgage-backed securities is a way of pushing rates lower. Lower rates are good for banks and other financial institutions because they attract potential borrowers looking to take advantage of a good deal.
“If you look back to 2009 to 2013 when [home] prices were at all-time lows, financing was near impossible to get, because banks tightened up their lending requirements,” said Bond. Context is important here.
The financial collapse that started in 2008 reverberated for years. The Fed’s action now is an attempt to avoid a repeat. When you think about it, the Fed is actively encouraging spending. So, is now the right time to purchase a new home or refinance a mortgage?
“Some might say that now is not a good time to buy, because prices are so high. However, when prices are high, typically interest rates are low, and financing is accessible,” said Bond. “This allows you to buy a more expensive home while keeping your monthly payments manageable.”
Generally speaking, now is also a good time to refinance your existing mortgage, especially if you have a high interest rate. Let’s use a hypothetical example. Say you have a 30-year fixed-rate mortgage with a 4% interest rate on a $300,000 loan. Money is tight right now, and you’re looking to save any way you can. You fill out the necessary paperwork and are approved for a new 30-year fixed-rate mortgage with a 3% interest rate. This one-point drop has the potential to save you $260 a month.
Things to consider before refinancing
Interest rates are low, but that doesn’t mean you’ll necessarily get the lowest rate. A lot depends on your credit score. When refinancing, you also want to think about the long term. Do you plan on staying at your current home for a while? If not, you may want to consider keeping your loan’s current terms or maybe even selling. Why? Because there are costs and fees associated with refinancing. You’re probably not saving any money in those first few years after refinancing, because you’re paying off the costs and fees from the transaction. It could take three years or more before you break even and start to see those savings.
Too long, didn’t read?
Low mortgage interest rates are driving demand in the housing market. This demand is offset by limited supply. The combination of the two is driving up home prices, especially in five states: Idaho, Montana, Missouri, Arizona and Maine. Still, low interest rates make this a good time to buy or refinance. But remember: Borrowers looking to take advantage of these low rates should make sure their credit score is in good shape first.
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