Mortgage rates have risen. Now what?

from Vestavia Voice March 2023

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there are solid reasons to purchase a home now, especially if you’re renting.

“All of the great reasons for buying a house still exist,” Smith said. “We haven’t seen as good of a time to buy for renters, with rent rates going up 20 to 30% in the last two years.”

By LOYD MCINTOSH

When the Federal Reserve raised interest rates in early February to combat inflation, one area of concern for many potential homebuyers was how the Fed’s actions would affect mortgage rates and their ability to afford a new home.

However, Clint Thompson, a mortgage officer with Fairway Independent Mortgage Corp. in Inverness, says the perception that mortgage rates automatically increase following a rise in interest rates is incorrect. “There is always misinformation out there when people hear what the Federal Reserve is doing. They think, ‘Oh gosh, mortgage rates jumped a quarter of a percent,’” Thompson said.

While it is true that interest rates and other signals from the Federal Reserve influence the economy, Thompson said mortgage rates are more closely related to inflation rates than direct action from the Federal Reserve. Thompson explained that the interest rate hike should eventually have the opposite effect on mortgage rates if inflation slows.

“Mortgage rates can come down when the Fed makes a hike, because overall it’s more about inflation than interest rates,” Thompson said. “You may see that 30-year mortgage rates actually improve because the markets interpret that as a positive move.”

Largely due to government spending during the COVID-19 crisis, the U.S. inflation rate grew at a rate of 6.5% in 2022, according to data published by the U.S. Department of Labor in mid-December, after growing to 7.1% in 2021. Among the areas the government spent additional funds, according to Thompson, were mortgage-backed securities and treasuries, which kept mortgage rates from organically adjusting to market forces, a concept known as “quantitative easing.”

“The Fed basically ignored the whole inflation factor and continued to buy treasuries and mortgage-backed securities,” Thompson said. “That artificially kept interest rates down close to 3%.”

As the government slowed quantitative easing measures over the past 12 months and raised interest rates in February, mortgage rates rose from an average of 3% for a typical 30-year mortgage to just over 6% in under a year, While the rapid rise may create sticker shock among homebuyers, Thompson said the market is responding organically to the Federal Reserve’s policies and, although mortgage rates spiked to more than 7% recently, potential homebuyers should start seeing rates lower in the second and third quarter of 2023.

“We’ll just have to see how it all plays out, but the consensus is we should see 30-year mortgage rates close to 5%, maybe even just a fraction below 5%, sometime this summer,” Thompson said.

Fred Smith, owner and operator of The Fred Smith Group RealtySouth agency in Crestline, said the Federal Reserve’s interest rate hike may finally return the local real estate market to a much-needed state of normalcy. Smith said the economic conditions of 2020 through 2022 created unnatural conditions in the market that should stabilize now that mortgage rates have risen.

“People are getting used to the rates. It’s not like they’ve gone up to something that’s unreasonable. They’ve normalized,” Smith said.

“2019 was the last normal market. Then we had 2020, and we worked our way through that market, then we entered a seller’s market in 2021 and 2022 with bidding wars and all that kind of stuff,” Smith said. “Now, I feel it’s going to be a normal 2023.”

With 30-year fixed mortgage rates hovering at 6.9% and housing prices on the rise, what do the current conditions mean for the average homebuyer? Smith and Thompson both recognize that affordability is a factor in many cases but said

For homebuyers for whom a one-point or twopoint rise in rates could cause monthly-payment sticker shock, Smith suggested a couple of strategies. First, he said an interest rate buydown is a viable option or an adjustable rate mortgage, especially for new homebuyers likely to move within five years of their purchase.

“In Crestline, the average homebuyer lives there less than seven years,” Smith said. “If they get a seven-year ARM and they’re moving about every five years, why have a 30-year fixed rate when you can take advantage of a lower interest rate?”

Thompson, who said he believes mortgage rates should settle back down to 3 or 4% over the next few years, suggests a two-for-one buydown mortgage. This option allows the homebuyer to pay 2% lower than the actual rate for the first year of the mortgage, then 1% lower for the second year, then the rate increases to the regular rate in the third year.

At current rates, a homebuyer would pay 4.9% in year one, 5.9% in year two, then 6.9% for the remainder of the loan or, Thompson said, refinance prior to year three.

“If the experts are right,” he said, “that person’s never going to make a payment in the sixes because interest rates will have come down close to 5% and we would have refinanced down before then. So, a two-for-one buydown option can help with affordability.”

Smith also offered one more piece of advice, reminding potential homebuyers they are allowed to write their home’s interest off their taxes. “I’m not going to say it doesn’t matter, but the benefit of being able to write off that additional interest is a wash,” Smith said. “It almost doesn’t matter, because that interest deduction can overcome the difference in that increased interest rate.”

The technology makes available in seconds what in the past would have required “immense amount of brain power,” said Whit McGhee, director of public relations for Vestavia Hills City Schools.

For example, McGhee said the technology can write a poem about plants in the style of William Shakespeare: “Oh, gentle plants that grace our Earth below, With verdant leaves that shimmer in the sun, Your beauty fills our hearts with tranquil glow, As we behold your splendor, one by one.”

ChatGPT’s influence is growing by leaps and bounds, according to a report by Reuters. It took Netflix 3½ years to get to 1 million users. It took Twitter two years. Facebook achieved 1 million users in 10 months, while Spotify surpassed the mark in five months. Instagram outpaced them all, obtaining 1 million users in 2½ months.

ChatGPT had more than 1 million users in five days.

Vestavia Hills High School English teacher Ben Davis said the technology is “really impressive,” though it does not “dig in” like teachers want their students to do.

Still, Davis said several students have been caught trying to use the technology to cheat, a major concern with ChatGPT, which not only can produce original content but can create different responses to the same prompt.

Still, there are some “bugs” to be worked out, McGhee said. It cannot recall information after 2021 or speculate about the future, and its responses may not always be what teachers are seeking.

Using technology to try to score higher than another student or improve a grade goes against the school’s code of ethics, Davis and McGhee said.

McGhee said tools are needed to help educators ascertain whether submitted content was written by a student or by a bot. While websites like turnitin.com detect plagiarism, they cannot, at least as of yet, determine whether the content was written by a human.

“We need to teach students the ethical use of this technology,” McGhee said.

Youth Leadership Vestavia Hills takes the lead in teaching digital citizenship to younger students, he said.

While ChatGPT and similar sites are blocked on school computers, McGhee said that solution will only last for so long.

It might lead to a change in the form of assessments, both McGhee and Davis said. Davis said it might force teachers to go back to handwritten assignments.

ChatGPT does not just present a challenge when it comes to preventing cheating, but also in how it can disrupt the importance of learning, Davis said.

“I learned a lot about writing from working in my dad’s furniture shop in Pelham,” he said. “Knowing how it [furniture] is constructed and why. …. Not knowing makes it weaker, less refined.”

In the same way, simply using technology to create content instead of learning how to properly create a poem, essay or other type of assignment weakens a student’s writing, which Davis said is “like a human superpower.”

“It’s going to be very uncomfortable as they go to read it,” he said.

McGhee said the technology does not nullify the need for great teachers.

“There is a human element in everything we do,” McGhee said.

As advanced as this technology is, McGhee said it will only become “exponentially more advanced.”

“For a kid entering kindergarten, this is the most rudimentary technology they will see in their lifetimes,” he said.

Still, McGhee said he is hopeful that Vestavia’s reputation will remind students of their responsibility.

“Vestavia Hills has always been a community that has focused on academic excellence,” McGhee said. “It’s always been a point of pride that they [students] did it themselves.”

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