Fall is finally upon us, and that means things are cooling down - both outside and in the housing market. Beyond of the typical seasonal slowdown where the number of new listings halves the Spring peaks, we're also experiencing a general cooling of the housing market due to rising mortgage rates. For over a decade, we enjoyed a strong economy and sub-4% interest rates, but as inflation rises and rates creep towards 7%, many homebuyers are having second thoughts.
“A recession can dampen consumer confidence even for those with financial capabilities to buy a home,” remarked National Association of Realtors chief economist Dr. Lawrence Yun. “The housing market is sensitive to changes in mortgage rates and if somehow inflation turns ugly and the Fed has to be even more aggressive, then mortgage rates could top 7% and actually halt home price gains.”
For buyers and sellers alike, this is a grim outlook. As rates go up, so do monthly payments for new homebuyers, which ultimately drives down home prices. Using rough numbers, $1,300 per month will get you a $225,000 home today, versus close to $300,000 just 18-months ago. It's the ultimate lose-lose scenario. But the alternative, theoretically at least, is inflation. One of the Fed's best defenses against inflation is to raise interest rates but raising them too far could lead to recession (if we're not already there) - or worse stagflation, a term once relegated to the history books.
Meanwhile, us commonfolk are left to grapple with difficult market conditions as the Fed walks the tightrope between inflation and recession. That being said, the economy is predictable to an extent. While we can’t know exactly when things will turnaround, economics holds true to the most basic law of physics – what goes up must come down – it’s just a matter of time. Fortunately, there are some things we can do to position to be in a good place when the market does shift.
Melissa Cohn, regional vice president of William Raveis Mortgage stated in a 9/21 CNBC article, “You marry the house but date the rate...it’s highly likely that rates will be lower by the middle of next year and even if that projection misses the mark certainly by the end of 2023 or early 2024.”
In other words, long-term buyers shouldn’t stress too much about interest rates. Sure, 7% is a tough pill to swallow but you may only have to live with that for a couple years before refinancing into something lower. If you plan to stay in a home for 10+ years and can afford a higher monthly payment, now’s not a bad time to buy, especially if rates fall again next year. Keep in mind, high interest rates negatively impact prices, so an interest rate drop will not only give homeowners a chance to refinance but should also give them a nice boost in home equity.
Another way to look at things is from a historical perspective. A July article by Business Insider, stated, "The reason it may seem like [interest rates] are extremely high now is due to the sudden and dramatic drop experienced during 2020. At that time, the Federal Reserve purchased large amounts of treasuries and mortgage bonds to help stabilize the economy. It resulted in the 30-year fixed-rate mortgage falling from 4.6% at the end of 2018 to an all-time low of 2.70% at the end of 2020. The abrupt decline was rare as data from Freddie shows a plummet in rates has only happened twice before in the past 20 years — in 2003 and after the housing crash in 2009. During those time periods, home price growth experienced upward trajectories similar to price appreciation seen in the Covid-19 housing market.”
Put simply, abrupt changes in interest, whether increasing or decreasing, draw lots of attention and that’s what we’re seeing now. With that in mind, prices are still up over this time last year. The average Central Ohio home sold for $337,963 last month, a 9.7% increase over August of 2021. On a price per square foot basis, the increase was even sharper – an 11% increase from $167 to $185.
While price is often the most important metric, there are some other statistics that show a less optimistic outlook. Days on market, for example, is up from 11 days in 2021 to 15 days in 2022. The number of homes sold last month was down 13% and the number of homes under contract was down 19%, which shows buyer activity is seriously slowing down. On the other hand, seller activity is slowing as well. New listings in Central Ohio fell by 14.6%. All in, total home inventory remained relatively flat – 3,499 homes for sale this August, a modest 2.4% increase to August 2021. So despite rising interest rates, demand remains relatively high – at least for now and at least enough to keep things relatively stable. As long as rates don’t continue to increase and inflation starts coming down, we should see things start to “normalize” back to 2021 levels within the next 12-18 months.
If you have any questions about economics, real estate, or if you’re just looking to save money in commissions when selling your home, please don’t hesitate to reach out. Until next time, stay class Columbus.