What 7% Mortgage Rates Mean for Home Buyers

Buyers should focus on what they can control rather than try to predict mortgage rates

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Higher mortgage rates appear to be sticky. PHOTO: DAVID PAUL MORRIS/BLOOMBERG

The math on buying a home grew even more depressing in recent weeks as mortgage rates approached 7%. Further frustrating buyers is the expectation rates could remain high for some time.The average rate on the standard 30-year fixed mortgage rose to 7.09%, according to a survey of lenders released on Thursday by mortgage-finance giant Freddie Mac

Many of those waiting for the right time to buy a house had hoped mortgage rates peaked last year. Rates dropped a bit in early 2023, but elevated mortgage rates seem to be sticky. Though some still predict mortgages will be cheaper by year’s end, much depends on the Federal Reserve’s decision at its September meeting. The Fed doesn’t set mortgage rates directly, but a further increase to interest rates could in turn push mortgage rates even higher.

If the Fed says inflation is contained, then mortgage rates are likely to slide down to about 6% by year-end, said Lawrence Yun, chief economist at the National Association of Realtors. If the Fed continues to be aggressive and raises rates again, then mortgages could hit 8%, he said. 

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Mortgage rates are closely tied to the 10-year Treasury yield, which has remained high despite promising inflation data and expectations the Fed will ease off rates.

In the past year or so, the difference between mortgage rates and the 10-year yield has been larger than usual. The stickiness of the 10-year yield is why mortgage rates could remain high even if the Fed backs off, said Yun.

Mortgage rates could still drop without the 10-year yield coming down if there is greater demand for mortgage debt, said Chen Zhao, Redfin’s economic research lead.

Rather than trying to make a bet on the direction of rates, potential home buyers should focus on what they can control, such as their budgets and choice of property, financial advisers say. 

Here are four ways to cope with today’s higher rates: 

No crystal ball

Trying to time your home buying based on economic forecasts isn’t only stressful, but often impractical.

Buying or selling a home isn’t like trading stocks—it is a medium-to-long-term investment that can’t be precisely timed, said Jenny Schuetz, a senior fellow at Brookings Metro. 

For most people, the right time comes down to personal circumstances: moving to another city for a new job, getting married, having children or getting a raise, she said.

Downsize your expectations

Higher interest rates mean your housing budget won’t go as far, so potential buyers may need to adjust their price range downward, if they haven’t already.

This is no doubt difficult for some buyers to accept if they have seen their friends buy bigger homes with lower mortgage rates, said Schuetz.

For those determined to buy now, it helps to be flexible and willing to make compromises, such as forgoing a third bathroom or buying outside of your preferred location, said Aniva Hinduja, general manager of home and mortgage at Credit Karma.

You can aim to trade up later.

“Your house doesn’t have to be your ‘forever home,’” said Brian Seay, a financial adviser in Huntsville, Ala.

Focus on the monthly payments

Buyers should look beyond the headline number and consider how much interest rates influence their potential monthly housing payment, said Hannah Jones, economic data analyst at Realtor.com. (News Corp

, owner of The Wall Street Journal, also operates Realtor.com.)  

For example, financing a $440,000 home with a 20% down payment at a 7% mortgage rate would mean a monthly mortgage payment of roughly $2,300, while a 6% mortgage rate would save a buyer about $200 a month, she said. The low supply of available homes is giving home builders reason to step up construction despite high interest rates. WSJ’s Justin Lahart explains the wider implications. Photo: David Paul Morris/Bloomberg

Some buyers who initially balked at the idea of a 7% mortgage may realize the difference in monthly payment compared with a 6% mortgage may be more manageable than they thought, ​​especially if they plan to stay put for more than five years and can refinance later, she said. 

Make sure your monthly payments don’t bust your overall budget, financial advisers say. 

See what other areas in your budget you can cut to give you enough breathing room, whether forgoing dinners out or new clothes, said Francisco Ayala, a financial planner in Phoenix. 

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