For most Americans, mortgage rates are one of the most important considerations when deciding on the timing of a home purchase. Whether you're a first-time buyer or are wanting to move, the rate you lock in -- potentially for 30 years -- has to play a big part in your thinking.
Mortgage Rates Are Critical ...
And right now, rates are very low. Looking at Freddie Mac's monthly archive for 30-year fixed-rate mortgages (FRMs), they averaged just 3.67 percent in April. You have to go back to May 2013 to find such a low monthly average. A year earlier, in April 2014, they stood at 4.34 percent, and five years earlier they were at 5.10 percent. Indeed, in April 2015, they were within spitting distance of the all-time low, reached in December 2012, of 3.35 percent.
It's true that, at the time of this writing, the 30-year FRM rate is moving up -- though it may be heading south again by the time you read this. Either way, it has a long way to go before it stops being a remarkable bargain by historical standards.
What seems close to certain is that sooner or later all rates are going to go up -- and stay there, at least in the medium term. Yes, experts have been saying that for years, and it's yet to occur. But it's almost bound to happen, and many expect the sustained climb to begin within months rather than years. To begin with, the Federal Reserve's Federal Open Market Committee is signaling that it's going to raise the "discount rate" sometime later this year, and that has a big influence on the base rates lenders use. But also, the low interest rates seen in recent years have been symptoms of exceptional economic circumstances, and a return to normality is likely to see a return to more normal mortgage rates.
... But Other Factors Are Also Important
Of course, it's not just interest payments that affect a decision to buy a home or bide your time. Two other particularly important factors are household income and the price of available properties.
The National Association of Realtors combines rates with those other two considerations (and a couple of less essential ones) to calculate its Housing Affordability Index. Unfortunately, that suggests you should have bought in 2012. Back then, the median price for an existing family home was $177,200, but in 2014 it was $208,900. Yes, median family incomes went up -- as did mortgage rates -- over the same period, but not enough. In 2012, payments on newly purchased homes took on average 12.7 percent of income, while two years later they accounted for 15.2 percent.
Does that mean you've missed the boat? Of course not -- and not just because mortgage rates are down again.
What Might Happen Next
Fannie Mae and the Mortgage Bankers Association (MBA) each has a team of economists who forecast a range of housing-related data. And they expect mortgage rates and home prices to rise over the next couple of years.
In its April 2015 forecast, for example, the MBA said it expects the average rate for 30-year FRMs to be 4.4 percent in the last quarter of 2015, and a scary 5.3 percent during the same period in 2016. Meanwhile Fannie Mae forecasts the median price for existing homes to be $216,000 by the end of this year, and $225,000 by the end of next. Those are up from $199,000 during the first quarter of 2015. True, the MBA is more conservative about home prices, and Fannie more so on rates, but both agree on an upward direction.
A fourth consideration for your home purchase decision concerns where you want to buy. Local market conditions can have a huge impact on housing affordability and the attractiveness of home ownership.
The late Harvard economics professor John Kenneth Galbraith once observed, "The only function of economic forecasting is to make astrology look respectable." And, let's face it, the track record of the current generation is even more dismal than that of his. But when you're making a key decision, such as the timing of a house purchase, you can only go on the basis of the best information available. And, right now, that's suggesting the sooner you act, the better.