How Higher Mortgage Rates Could Help California Home Buyers

If you’re planning to buy a home in California in the near future, you’ve probably already heard the news about mortgage rates. The average rate for a 30-year fixed mortgage loan recently rose to its highest level in more than 20 years.

There’s an upside and a downside to this trend.

How Buyers Could Benefit From Higher Rates

Higher interest rates can reduce affordability for home buyers by increasing the size of the monthly mortgage payments. That’s the obvious downside.

But many home buyers in California don’t realize that higher mortgage rates could work to their advantage in other ways, especially when it comes to house hunting and negotiating. Here are some of the not-so-obvious advantages:

1. Less competition

When mortgage rates in California rise, it means there are fewer people who can afford to buy a home. That’s the “obvious downside” mentioned earlier. Higher rates increase overall housing costs, which in turn reduces demand among buyers.

But for the remaining home buyers who can still afford to make a purchase, this demand reduction brings some significant benefits. It also reduces the level of competition within the housing market.

Through the rest of 2023 and into 2024, home buyers in California could find that the real estate market is a lot less competitive than it used to be. We probably won’t see nearly as many bidding wars or offers above the asking price, when compared to the past few years.

This paves the way for other benefits as well, including the ones listed below.

2. More negotiating leverage

In California, the home buying process almost always includes some back-and-forth negotiating between the buyer and seller. It’s rare for a seller to accept the first offer they receive without making any changes or amendments whatsoever.

In a typical real estate scenario, the buyer will make an initial offer, the seller will make a counteroffer by adjusting the sale price or other terms, and eventually the two parties will find common ground.

In a seller’s market (where there is high demand and low supply), there tends to be less back-and-forth negotiation. Sellers have the luxury of accepting the highest offer and dismissing all of the others. They don’t have much need for negotiations.

But when the market slows down — due to higher mortgage rates or other factors — sellers can be more willing to negotiate. During a significant cooling trend, the market might even “flip” from favoring sellers to buyers. With fewer offers coming in, sellers cannot afford to be as selective.

This is another way that higher mortgage rates can benefit home buyers in California. By reducing demand and cooling the market, higher mortgage rates can give home buyers more negotiating leverage when it comes to the price, contingencies, and other aspects of the sale.

3. More time to evaluate properties and prices

Three years ago, the COVID pandemic accelerated the California real estate market into a frenzied state. Bidding wars erupted. Home buyers were making offers well above the asking price. Sellers were receiving dozens of offers within the first week of being listed.

Back then, it was common for home buyers to make offers on the spot, while viewing a property. Some buyers even submitted offers “sight unseen,” just as soon as a new listing hit the market.

That’s a less-than-ideal scenario from a home buyer’s perspective. In such a fast-moving market, buyers don’t have much time to evaluate the property, the neighborhood, the sale price, and other important factors.

In 2023, however, real estate markets across California are moving at a slower pace. Higher mortgage rates and home prices have a lot to do with this. The rise in mortgage rates, in particular, has led to an overall slower pace within the real estate market, compared to the frenzy of recent years.

This can benefit California home buyers in several ways. It gives buyers more of an opportunity to evaluate the property by doing the following:

• Review comparable sales data to determine if the asking price is reasonable.
• Have the home thoroughly inspected to make sure there aren’t any major flaws or damage.
• Research the neighborhood, local schools, transportation, and other important factors.

A slower-paced housing market also gives buyers a chance to compare different properties that they have visited, and to make a more thoughtful decision before submitting an offer. It gives them a chance to “sleep on it” before making a final decision. And that’s not always possible in a fast-moving market with higher competition among buyers.

Offsetting the Effect of Higher Mortgage Rates

As we’ve just discussed, higher mortgage rates can bring certain benefits for California home buyers. But they can increase your housing costs, as well.

So let’s talk about some of the steps you could take to offset this effect, either by getting a lower rate or reducing the size of your monthly payments.

• Consider adjustable-rate mortgages (ARMs): ARMs typically start with lower interest rates compared to fixed-rate mortgages. While the rates on ARMs may increase over time, buyers who don’t plan to stay in their homes for a long period might benefit from the initial lower rates.
• Improve your credit score: A higher credit score can make borrowers more attractive to lenders and potentially result in lower interest rates. Taking steps to improve a credit score before applying for a mortgage could lead to better borrowing terms.
• Consider buying points: Buyers have the option to “buy down” their interest rates by paying discount points upfront. Each point is typically equal to 1% of the loan amount and can lower the interest rate over the life of the loan.
• Negotiate with sellers: In a market with rising rates, sellers might be more willing to negotiate on price or contribute to closing costs to close the deal quickly. Buyers can use this to their advantage to offset some of the costs associated with higher rates.
• Explore government programs: Government-backed loan programs, such as FHA (Federal Housing Administration) or VA (Department of Veterans Affairs) loans, often have competitive interest rates and more flexible qualification requirements.
• Lengthen the loan term: While longer loan terms result in more interest paid over time, they also come with lower monthly payments. Buyers who are concerned about affordability due to rising rates might opt for longer loan terms to ease the immediate financial impact.

The bottom is that higher mortgage rates could make it easier for a California home buyer to purchase a home, especially in a market that typically experiences a high level of competition.