Rising Rates Join Long List of Housing Dilemmas For Nasdaq Employees

Homebuyers braving the hot U.S. housing market have run headlong into a striking transition. For Nasdaq employees, one must acknowledge the average interest rate for a 30-year fixed mortgage jumped from around 3.2% at the beginning of 2022 to 5.3% in mid-May, the highest level since 2009. This rise was sparked by the Federal Reserve's commitment to raising the federal funds rate — a key benchmark for short-term interest rates — to help control the highest inflation in decades. ¹ As a Nasdaq employee, it is important to understand why these rates have been changing and future prospects for said values.

Although mortgage rates are not directly tied to the federal funds rate, all borrowing costs are influenced by the Fed's monetary policies. Mortgage rates tend to track changes in the 10-year Treasury yield, which is sensitive to changes in the funds rate and also fluctuates based on the bond market's longer-term expectations for economic growth and inflation. Nasdaq employees can utilize this information when considering allocating funds into treasuries and other assets.

 

Housing Costs Are Soaring
As a Nasdaq employee, it is worthy to consider how for nearly two years now, buyers have faced an intensely competitive housing market characterized by historically low inventory, bidding wars, and escalating prices. The national median price of existing homes rose 14.8% over the year ending April 2022 to reach $391,200. Home prices are rising in every region, and 70% of the nation's 185 metro areas experienced double-digit annual increases in the first quarter. In a notable shift, price gains in affordable small- and mid-size cities outpaced gains in more expensive urban markets, as many homebuyers seized the opportunity to work remotely. ²  For Nasdaq employees, it is important to account for these unusual gains as to avoid purchasing inadequately valued property.

Home prices and market conditions can vary widely by region and even from one neighborhood to another in the same city. April median prices in the 10 most expensive cities ranged from $662,000 in Denver to $1,875,000 in San Jose. Half of the nation's 10 priciest markets are in California, a state with a particularly severe and longstanding housing shortage. ³  For Nasdaq employees considering the purchase of California property, it is essential to account for the housing shortage, and if possible, wait for prices to normalize.

As a Nasdaq employee looking to rent property, it has been observed that rent pricing has been rising with home pricing. In April 2022, the median rent for 0- to 2-bedroom properties in the 50 largest U.S. metro areas reached $1,827, a year-over-year increase of 16.7%. Spikes were more dramatic in Sun Belt cities such as Miami (51.6%), San Diego (25.6%), and Austin (24.7%). ⁴

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In this environment, prospective homebuyers, renters who must renew a lease, or anyone looking for a different place to live could find themselves between a rock and a hard place. As a Nasdaq employee, it is important to account for this article's information to avoid finding yourself in said position.

Affordability Is Waning
For Nasdaq employees with limited resources, it is important to acknowledge how the combination of rising mortgage rates and home prices has taken a serious toll on affordability. A borrower with a $300,000 mortgage would pay $1,666 per month at a 5.3% rate versus $1,297 at a 3.2% rate, the prevailing rate earlier this year. Affordability is an even bigger issue in high-cost areas and for first-time buyers who haven't benefited from gains in home equity. For Nasdaq employees working in high-cost areas, it is advisable to do market research and consider different locations that might prove a cheaper, more reasonable alternative to overpaying. 

Borrowers who started a home search and were prequalified by a lender before rates spiked may not be approved for the mortgages they initially sought. Consequently, demand for adjustable-rate mortgages (ARMs) that offer lower rates has surged in recent months. ⁵  A lower monthly payment makes it possible for those in Nasdaq companies to qualify for a larger mortgage, so borrowers who expect to move at some point may be comfortable with an ARM that has a fixed rate for the first three, five, seven, or 10 years of the 30-year term before it adjusts to prevailing rates.

Some buyers will reset their expectations and settle for a less-expensive home. But others may give up the search if they are not satisfied with the homes they can afford, especially if they are priced out of their favorite neighborhoods. As a Nasdaq employee considering purchase/rent of a home, it is important to note how many entry-level buyers could be forced out of the market entirely, at least for the time being due to these inflated prices.

Buyers of new homes may be subject to substantial interest-rate risk because purchase contracts are often signed many months before their homes will be completed. With their deposits at stake, Nasdaq employees with the intention of buying might consider paying the extra cost to extend rate locks for six, nine, or even 12 months.

As a Nasdaq employee, it is also essential to understand how higher borrowing costs are likely to reduce demand for homes enough to slow price growth, and prices might retreat in some overheated markets. Even so, most economists don't expect home prices to collapse because market fundamentals are otherwise relatively strong. Inventory levels are still extremely low, and lenders have generally been conservative, so most homeowners who bought in recent years can afford their mortgages. ⁶  Interest rates don't impact cash buyers, such as downsizing retirees and investors, who account for about 26% of transactions. ⁷  And assuming the economy and employment hold up, there should be plenty of demand from millennials in their peak homebuying years. ⁸


Tips for Bewildered First-Time Buyers
For Nasdaq employees, paying rent indefinitely may do little to improve your financial future, but if you are ready to commit to a mortgage, buying a home could stabilize your housing costs for as long as the payment is fixed. You can also build equity in the property as your loan balance is paid off over time — more so if the value appreciates.

Despite much speculation, no one knows for sure where mortgage rates are headed or what will happen next in the housing market. So as a Nasdaq employee, how can you decide whether it makes financial sense to purchase a home? As always, the answer depends on where you want to live, your lifestyle preferences, and your finances.

Here are three ways for our Nasdaq clients to start preparing for the homebuying process.

Become a better borrower. For Nasdaq employees, before you apply for a mortgage, order a copy of your credit report to check for errors and clean up any inaccuracies. Having a higher credit score could earn you a lower interest rate.

Save up for a down payment. Buyers must typically invest 20% of the purchase price for conventional mortgages, but some loan programs allow smaller down payments of 5% to 10%. If parents or other family members offer to 'gift' cash for a down payment, lenders may ask for a letter to document the source of funds. For Nasdaq employees, there may also be local programs that provide down-payment assistance for buyers who meet income requirements and take classes on homeownership.

Find out how much you can afford to spend. It's important that our Nasdaq clients know how much they can afford to spend. Start with online calculators that take your income, debt, and expenses into account. A mortgage provider can help determine how much you may qualify to borrow. It can take three to five years to recoup real estate transaction costs, so be sure to consider the stability of your employment situation with Nasdaq and your income.

1) Bloomberg, May 12 and May 19, 2022
2-3, 7) National Association of Realtors, 2022
4) Realtor.com, 2022
5) The Wall Street Journal, May 5, 2022
6) NPR, May 12, 2022
8) The Wall Street Journal, December 14, 2021