I’ve found that many of my clients and prospective clients are worried about interest rates, and their affect on their home’s value or on their ability to buy.
They ask, “what’s going to happen? Are we due for a crash? Is this the market shift buyers have been waiting for?”
No matter what the market is doing, I always have to answer questions about the future this way, “Who knows?”
Having said that, I can give you a look at what’s happening in the market today, and remind you a little of what happened in the past.
It might give you some comfort… or not.
Buyers React to Higher Rates
Everyone knows that interest rates affect the housing market, right? It makes sense. When rates drop, housing becomes more affordable, often causing and mitigating a rise in prices. Consumers feel confident, locking in low rates for the long-term, and for many, mortgage payments can be less than rent. Buying becomes somewhat of a no-brainer.
So, when rates rise, we expect to see a slow down. Buyers lose confidence, some opting to wait and see if rates and/or prices will fall. Some simply can’t afford to buy.
That’s what usually happens, but not this time. Not yet.
Rates on the Rise
The national 30 year fixed mortgage rates averaged 3.27% at the end of 2021. By February, rates rose to 3.76%, and by March 1, 3.97. This week, according to Forbes.com, the national average is 5.1%.
That means a $400,000 mortgage which would have had a $1745 monthly payment for December, but if buying today, the payment would be $2172, a difference of $427 per month.
So, what happened. Did buyers lose confidence? Did they pull back from the market?
The short answer is ‘no’, or maybe, not yet.
At first glance, it seems that buyers are moving full-steam ahead.
Multiple Offers, Rising Prices Still the Norm
359 of the 498 Sacramento County homes pending sale since April 1 had multiple offers. That’s 72%, a number consistent with the busiest months of 2020 and 2021. 129 of them had 5 or more offers.
Instead of prices falling, they continue to rise. The average price of homes sold in the Tri-County Area (Sacramento, El Dorado, Placer) in March was $639,000, the highest prices ever recorded, and in Folsom, the average is $887,000
So, can we conclude that buyers are well-heeled and don’t care about rates? Could it be that the fence-sitters are getting in while the getting is still good? Are buyers just glad we aren’t back in the 90’s, when rates were over 10%?
Mortgage Applications Down
Evangeline Scott of Reliance Home Loans says that initially, she saw many of her pre-approved buyers jumping into the market before prices and rates went up any further.
She has seen a decrease, however, in new purchase loan applications, and Moody’s analytics showed a 6.3% decline in applications nationwide last week, following a 6.9% decline the week prior.
Evangeline also had some pre-approved buyers postpone their plans, and 2 actually backed out of contracts over market fears.
Don’t Forget the Past
Real Estate veterans remember back in 2003 to 2005 when we had 20 to 25% annual price gains, multiple offer situations, and people camping out at new home developments, hoping to get a chance at buying.
That run up was due in part to the fact that rates FELL below 6% for the first time in history, making homes more affordable, and buyers were locking in those low rates that couldn’t possibly go lower.
Rates stayed low for a couple of years, but by 2007, were averaging 6.7%. At that time Folsom had over 400 homes on the market, and the worst was about to happen. At one point there were 581 homes on the market in Folsom, and today there are 66 Folsom homes for sale.
Now, with rates RISING to over 5%, and some feel that’s enough to kill the market.
Home Owners Have Equity and Lots of It
We’ve seen equity gains of about 20% each of the past 2 years. We can’t expect that pace to continue, but it has provided quite a cushion in the market.
In fact, Black Knight’s February 2022 equity report showed that the average loan to value of American home owners was below 45% for the first time in recorded history.
Further, with the exception of VA, there are very few zero down loan programs, and with multiple offer situations, many buyers were bringing significant cash to close, and that further protects the market.
In other words, a lot of equity would have to be eaten up before we’d see a wave of foreclosures.
When Folsom’s average price per square foot peaked at $281 in 2005, it took 7 years to bottom out, at $148 per foot.
Today’s average is $389 per square foot. What happens if prices fall? Can we expect them to some day come down to 2012 levels? 2005? No one knows.
What Happens Next?
The coming weeks and months will tell us whether rates will continue to rise, or calm down. Expectations are that they will continue to rise, but we’ve seen this pattern before, where we have a steady increase then a pull-back on rates.
If, however, rates do continue to rise, affordability will suffer, and we very well may see buyers exit the market, and as a result, sellers reducing prices to attract the buyers who remain in it.
For now, the market remains strong and competitive.
Any questions? Drop me a line.
Steve Heard, EXP Realty of California, Inc.
steve@myfolsom.com – 916 718 9577 – DRE#01368503