Options for house hunters as mortgage rates remain high

In my experience, most homebuyers anticipate lower mortgage rates as soon as inflation begins to drop.

I’m here to tell you, it’s time to reset those expectations. Buyers can forget about lower mortgage rates anytime in the foreseeable future. On the flip side, maybe a 7% rate doesn’t look as bad as an 8% rate. But be ready: Higher rates are ahead.

When I started my mortgage career in 1986, the 30-year fixed-rate averaged about 10.5%. As luck would have it, mortgage rates gradually decreased over time to almost zero during the pandemic. For the first 35 years it often seemed that when I arranged a purchase or a refinance mortgage, I was delivering cheaper money to my clients than their departing mortgage. Easy peasy.

Going forward, is my career headed toward another mortgage rate boomerang?

The world is in a different place today. The U.S. has an unsustainable $40 trillion debt problem. As an aside, the national debt was roughly $2.125 trillion in 1986. And too many other countries have the same debt dilemma: needing to borrow huge amounts of money to keep afloat, relative to their gross domestic product.

Piling on with geopolitical energy price shocks, housing costs, artificial intelligence and the insatiable appetite for borrowed funds, it’s going to take a long time to conquer inflation.

The Consumer Price Index jumped 3.7% in September, according to the Bureau of Labor Statistics.

The market is seeing too much borrowing demand and not enough savers willing to loan money. Hence, higher borrowing costs.

The Freddie Mac 30-year rate averaged 3.05% at the end of 2021 as effects of the Federal Reserve’s pandemic efforts still swirled. By mid-September 2022, that’s 9 short months later, the rate had doubled to 6.02%. With a one-week exception (February 26, 2026 when it was 5.98%) rates have averaged well above 6% ever since.

What is this conundrum going to look like for potential homebuyers and sellers? It depends on who you ask.

“Inflation accelerated in September, with both headline and core readings exceeding forecasts,” said Sam Williamson, senior economist at First American. “The hotter report raises odds of an October Fed rate hike, likely extending the wait for lower mortgage rates and offsetting some of the affordability gains from rising incomes and cooling house prices.”

The Mortgage Bankers Association had their annual convention this week in Chicago. While I did not attend, here’s a recap from the MBA, which predicts the following:

—30-year fixed will average 7.3% in Q4, 2026. And rates will remain above 7% through 2027.

—Mortgage origination volume is expected to decrease 5% to just under $2 trillion in 2027 from the $2.1 trillion expected for the full 2026 year.

—The Fed will raise short-term rates by 0.25% in December and raise another quarter-point in early 2027.

In a press release from MBA, Mike Fratantoni, the organization’s chief economist, noted: “There are substantial uncertainties associated with this forecast, with the potential for geopolitical or financial market shocks to further dampen consumer confidence, which could lead to an abrupt slowdown in the economy. The risks of a recession are elevated. At the same time, if the Middle East conflict were to intensify yet again, oil prices could spike even higher given the drawdowns in oil reserves, and this could lead to even higher inflation.”

Across the nation, there were 63% more home-sellers than homebuyers (1,510,784 versus 928,892) in September, according to Redfin. This is the lowest level of buyers in Redfin’s records dating back to 2013. The number of sellers rose to its highest level since 2020.

Redfin separately reported that U.S. pending home sales (in which a seller and buyer are under contract) in September were at the lowest since 2014 (except during the 2020 pandemic freeze).

Of the pending U.S. home sales,14.5% of those deals fell out of escrow. This is the highest share on Redfin’s record.

The largest percentage of declining home sales in September were found in: Seattle down 24.4%, Los Angeles 16%, San Diego 15.8%, Anaheim 15.5%, Redfin reported.

“It’s not surprising that when rates climb above 7%, fewer people buy homes because fewer people can afford them,” said Chen Zhao, head of economic research at Redfin. “For buyers, less competition means more room to negotiate on price, on closing costs, on repairs and sometimes sellers even pay for a mortgage rate buydown. Slow sales also mean prices may flatten or fall in the not-so-distant future.”

I think median home prices in Southern California are going to fall an average 5% next year.

For motivated home sellers, it’s time to get your home on the market and sell, take your appreciation profits and run.

For well-priced, pristine properties, I’m still seeing bidding wars.

For motivated buyers needing mortgages, figure out how much less home you can afford, given the dramatic rate increases of late. If you can’t find what minimally suits your needs, then don’t buy now.

Don’t be surprised if mortgage rates continue to rise, as I believe they will, which of course further decreases affordability. Rate buydowns and adjustable-rate mortgages are worth considering.

Find yourself a take-charge real estate agent. Everything that can cost you money is negotiable in a buyers’ market, not just the price.

If you buy a home now that fits your wants and needs, and the value eventually falls, don’t worry about it, assuming you are in for the long haul.

Even during the 2008 mortgage meltdown and Great Recession, prices started to stabilize around 2011. By 2012, we were again seeing appreciation in certain Southern California areas. Over 10 or 20 years’ time you will enjoy plenty of property appreciation.

For any buyer thinking he or she is going to sell within the next five years, do yourself a favor and don’t buy.

Besides any possible property value decline, transaction costs to eventually sell that property and buy a replacement property is likely to cost you 8-10% of your home’s sales price. You’ll be better off renting for those five years.

Freddie Mac rate update

The 30-year fixed rate averaged 7.4%, unchanged from last week. The 15-year fixed rate averaged 6.71%, 2 basis points lower than last week.

The Mortgage Bankers Association reported a 2.7% mortgage application decrease compared with one week ago.

Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $628 less than this week’s payment of $5,766.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6.375 %, a 15-year conventional at 6.125 %, a 30-year conventional at 6.75%, a 15-year conventional high balance at 6.375% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 6.99% and a jumbo 30-year-fixed at 7.375%.

Eye-catcher loan program of the week: A 30-year mortgage, 30% down, 6.25% for the first five years payments, and 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com .