Bracing buyers for continuing rate hikes
In today’s edition of the Community, we’re going to try and shed some light on where the Fed says interest rates are headed and why it means even more urgency for home buyers looking to make moves right now.
Even if people get their news from the neighbor’s day-old newspaper, basically everyone knows the Federal Reserve set a big increase in interest rates and promised several more rounds of rate hikes are on the way.
Dr. Lawrence Yun, chief economist for the National Association of Realtors, recently gave some insight on what’s happening and what to expect, “So far, the short-term fed funds rate that the Fed directly controls has risen by 175 basis points. But the 30-year fixed rate mortgage has risen even more – by nearly 300 basis points. On the same $300,000 mortgage, the monthly payment has risen from $1265 in December to $1800 today. That's painful and, consequently, will shrink the buyer pool.”
That’s a significant monthly budget adjustment for any income. Dr. Yun went on. “Home sales have recently been trending down towards 2019 figures. Sales could fall even further with some inventory sitting on the market for more than a month like in the pre-pandemic days. Pricing a listed home properly will, therefore, be the key to attracting buyers. In the meantime, rental demand will strengthen along with rents. Only when consumer price inflation tops out and starts to fall will mortgage rates stabilize or even decline a bit. That is why providing additional oil supplies will be critical in containing consumer prices and interest rates.”
Higher interest rates are implemented to combat inflation and will definitely douse an onfire real estate industry for the foreseeable future. Well, until they come back down again. Especially since higher interest rates equate to less buying power. Compared to only a year ago, a $400,000 home, with the increased rates, means buying power decreases to the $300,000 range.
If we plan for mortgage rates to climb .5% - 0.75% over the next several months, you’ll do well by helping buyers (and conversely sellers who want to keep their home in a reasonable price range) some authentic perspective around what their payments are going to look like next month. Or the month after.
A silver lining to all this is that there is a huge and emerging demand for homes among more than 120 million millennials and Gen Zs. It's just starting to play out, and that is going to keep parts of the housing market robust regardless of interest rates. The nation’s largest home builders are very excited right now. More about that in future posts.
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As always, reach out if we can be of any help.