Rising interest rates will put the squeeze on home buyers

EVERETT — A month ago, Heather and Tyler Ferrel began shopping for a new home.

Their 1,600-square-foot Marysville bungalow had become a tight fit for their two children, the dog and, lately, a flock of holiday visitors.

“We have family sleeping on the couch,” said Heather Ferrel, an elementary school teacher in the Marysville School District.

For months, the couple had been mulling a larger home.

But with talk of interest rates continuing to climb, it was time to go “hardcore” shopping.

If a home is on your wish list, now is a good time to go house-hunting, local experts say.

Interest rates for a 30-year fixed mortgage are below 5 percent, said Steve Erickson, senior vice president and commercial team leader for Snohomish County at Peoples Bank. “That’s still attractive,” Erickson said.

“It’s a great time to shop,” said Bridget Larsen, senior vice president of Everett-based Coastal Community Bank.

There are more homes on the market than earlier this year, Larsen said. “Sellers might be willing to negotiate.”

Courtney McClasky, a broker with Keller Williams North Sound Realty in Marysville, said prices are sliding. Price reductions, when they’re in place, are averaging about $10,000.

“In the last six to eight weeks, we’ve seen first-time buyers and people who are ready to move up — like the Ferrels — jump back into the market,” she said.

Why?

“People are trying to beat the interest rate rise,” McClasky said. “They’re seeing their buying capacity go down.”

For some, that means buy now — while rates are still low.

“Homes are going pretty quickly,” Ferrel said of her shopping experience.

The couple bid on four properties before their offer on a 2,900-square-foot home, 10 minutes from where they now live, was accepted.

“We were able to buy our new home below list price and sell our current home above list price,” Ferrel said.

It’s still a seller’s market, based on available inventory, Erickson of Peoples Bank said.

While a normal real estate market might offer a four- or five-month supply of homes for sale, the current supply is about 2½ months. That’s low, but an improvement over the 2017 market, which was averaging a one-month supply. (If there are 50 homes on the market, and 10 homes sell each month, that’s a five-month supply of homes for sale.)

McClasky said that sellers are still getting multiple offers “if the property is priced right, but they’re more likely to be considering two offers instead of 12.”

Buy now or wait for the traditional spring market?

Whatever you decide, it’s not too early to find a lender and get pre-qualified for a loan.

That process will let you know how much home you can afford and which cities or neighborhoods fit your price range, Erickson said. Pre-qualification letters are good usually for 120 days and can be easily updated.

And now is the time to pay down debt, said Larsen of Coastal Community Bank. Pay off the $1,000 balance on a credit card and “your credit score could swing upwards by 50 points,” Larsen said. A higher credit score makes you eligible for a lower mortgage rate, she said.

No one can predict what the 2019 real estate market will look like, but the consensus is that interest rates will continue to rise.

“In my opinion, you’ll see more houses on the market,” Larsen said. “Buyers will have more opportunities to get a good deal. But you will see rising interest rates, and that puts the squeeze on what you can buy.”

Erickson said interest rates could be another one-half to 1 percent higher in the spring, which would take some people out of the market.

Higher mortgage rates reduce buying capacity.

Here’s how it works: The monthly payment on a $1 million home with a 3.6 percent mortgage would only buy you a $400,000 home today with the current rate of about 4.6 percent, Larsen said.

Len Kiefer, deputy chief economist for Freddie Mac, and other financial experts expect the Federal Reserve to continue the trend of raising short-term interest rates.

“When the market anticipates that short-term interest rates will rise and remain high, longer term rates, (such as 30-year home loans) tend to follow,” Kiefer has said.

According to Bankrate.com, a bump in rates means a new mortgage can cost several hundred to thousands of dollars more over the life of a loan.

Seattle-based Zillow.com is predicting mortgage rates will rise steadily — to just under 6 percent by the end of 2019, the highest rate since the last recession.

On the plus side, “rising mortgage interest rates, higher rents and stiff competition for housing in the most desirable areas … won’t necessarily be a bad thing,” Zillow Senior Economist Aaron Terrazas said.

“A slower-moving market is likely to give more buyers a chance to catch their breath and choose from a wider selection of homes that fit their preferences and budgets,” Terrazas said.

Marty Steele, president and CEO of The Bank of Washington in Lynnwood, agreed. “You’re going to see more inventory,” Steele said. “Prices might continue to rise, but at a slower rate.”

Home prices are expected to grow about 3.8 percent in 2019, compared to 5.6 percent since January 2018, according to a Zillow survey.

Cassandra Sargent, assistant vice president and branch manager of Peoples Bank in Everett predicted “fewer cash deals.”

The odds of being outbid by someone offering $20,000 to $50,000 cash above the list price could become a thing of the past.

Kaelan Skye Tassi, 30, and her husband, Chris Tassi, 30, of Snohomish, ventured into the fray last March with a price cap of $300,000.

Their target area included Everett, Snohomish and Lake Stevens.

While there were plenty of two- and three-bedroom homes in the $280,000 to $310,000 range, “you knew you were not going to get them for list price,” Kaelan Tassi said.

During the ensuing six months, the first-time buyers made offers on two houses and a townhome. In each case, they were outbid, often in short order.

“We learned pretty quickly that if we wanted to buy the house we wanted, we’d have to be sitting on $50,000 cash.” Tassi said.

“Now it’s different,” she said. “You can see prices evening out. Now, when you’re looking there’s maybe two or three people instead of nine.”

Janice Podsada; jpodsada@heraldnet.com; 425-339-3097; Twitter: JanicePods