It’s January 2022, and the real estate market is still HOT! In Sacramento, we still see single-family homes and multi-family homes sell quickly and over the asking price, usually by tens of thousands of dollars.
Many people watching the market wonder when this is all going to slow down or if there is a bubble waiting to burst. While buyers are plentiful, sellers are not, which has created historically low inventory. Given the thin supply of resale homes and homebuilding that can’t meet demand, 2022 promises to be another busy year for real estate.
One thing we haven’t mentioned is mortgage interest rates. Rates have been historically low for the past several years, reaching their lowest levels during the peak of the pandemic. These low rates have helped keep money flowing in the real estate market. Now, everybody is talking about inflation and the Federal Reserve is planning to taper its purchasing of both treasury bonds and mortgage-backed securities (MBS) later this year. (Quantitative easing or QE 1, 2, 3, 4… ring a bell?)
The Fed’s policy of buying Treasuries and MBSs has been a tool used to help keep borrowing costs low to stimulate economic recovery over the last decade. With the economy growing faster than expected, the focus is now on slowing inflation. In addition to tapering its bond-buying program, the Fed has also announced that it plans to raise the effective federal funds rate (EFFR) at least two times in 2022, likely more.
But do the Fed’s policies really have much of an impact on mortgage rates? Yes and no.
Mortgage rates are tied to mortgage-backed securities. In the short term, we may see some volatility in anticipation of a rate hike. For example, after the Fed confirmed in December that they would hike the fed funds rate in 2022, we saw a spike in MBS that drove interest rates up a bit. But in the long term, the Fed really doesn’t affect long-term interest rates, such as mortgages. In fact, historically, when the Fed has raised interest rates, the mortgage market has reacted favorably in subsequent years.
The mortgage market will be something to watch in 2022, and I expect ups and downs. As I write this, interest rates for a conventional 30-year mortgage are up to around 3.8%, a decent increase from December. We believe we will continue to see a robust real estate market. However, as in previous years, we will see some buyers priced out of the market.
So, what types of loans are available?
6 Types of Mortgage Loans for Home Buyers
Conventional - Fannie Mae & Freddie Mac. Lowest cost of borrowing money for homeowners. The slightly more difficult qualifying standards result in less risky loans for lenders — and lower costs to borrowers.
FHA - Federal Housing Administration. Easiest to qualify for. Low down payment. More lenient on lower credit scores and higher debt-to-income ratios.
VA - U.S. Department of Veterans Affairs. For veterans and active-duty members of armed forces and the Reserves. No down payment and lenient qualifying guidelines.
Construction - Loan to help homeowners remodel an existing home or build a new home. Can include a conversion to a permanent loan feature once the construction is complete.
USDA - U.S. Department of Agriculture. Government loan program designed to increase home ownership rates in rural parts of our country. Carries geographical restrictions based on population and income limits. No down payment.
Non-QM - This is a newer type of loan lenders are offering that often carries unique qualifying factors (such as the use of bank statements or strictly rental income). These loans help fill the void for funding home loans for borrowers with unique financial circumstances. Make no mistake, these borrowers are still required to demonstrate an ability to repay the loan, but in a nontraditional way.
I want to thank Eric Wiegand (NMLS#274953) of Mortgage Masters of CA, who co-authored the post with me. If you are looking to purchase or refinance, if you are an owner occupant, own a second home, or an investor, we can help. Contact us with your scenario today!