What does this mean for real estate?
We knew it was coming! Mortgage interest rates have spiked over the last few weeks. Rates have been steadily rising since last summer, but the increases have been more drastic since the beginning of 2022. The 30-year fixed rates have inched up just over 4% this month up from our most recent low of 2.65% in January 2021. The experts were all saying rates could reach 4% by the end of 2022. Shocking to most, we’re already there! Fixed rate loans are now back where they were before the pandemic began.
Warning: I am going to be speaking out of both sides of my mouth on this one. My predictions below make perfect sense but, in the end, we’ll just have to wait and see what happens.
Right now though, inflation is the highest it’s been in 40 years and the Fed is winding down winding pandemic measures to support the economy by ending its purchasing of mortgage-backed securities. Both these factors are key drivers of rising rates.
So what does this mean for those contemplating a real estate purchase or sale?
From a very practical standpoint, if you’re a buyer, your Buying Power is going to be detrimentally affected by higher interest rates. For example, if you could afford a $1M purchase at a 3.0% rate, now with a 4.0% rate you will only be able to afford a $900k purchase (assuming the down payment stays constant). So just one percentage point reduces your buying power by about $100k.
If you must buy, do it. There are still many advantages to home ownership. But if a purchase is not imperative or you’re considering a second home purchase, I might wait a little while longer. The possible downward pressure on prices might also catch us off guard. That said, even a 4% rate is historically low.
And of course, if you are the seller of that same $1M property, a whole bunch of your potential buyers can no longer afford to purchase your home. The higher rates and lower buying power will undoubtedly be cause for negative press which in turn could shake consumer confidence in the market. Higher rates, negative press, reduced buying power – all factors putting downward pressure on prices.
Counter-acting that is our continued high demand and low inventory. But these factors may also be the trigger for sellers, that have been sitting on the fence trying to time the peak of the market, to put their properties up for sale. If that happens and the demand gets satisfied, the next natural progression is for prices to come down.
So, is it time to buy or time to sell? Personally, I’m going with “time to sell” and I’m sitting on the sidelines on the buy side. Of course, more often than not, your personal circumstances ultimately determine the path you take. I’m happy to talk about your individual needs and come up with the best strategy to accomplish your goals. Let’s talk!