The front page of yesterday’s Wall Street Journal (10/17) confirms what we have been “feeling” throughout 2023. The home buying frenzy that overheated markets in 1987 and 2007 has reached its pinnacle and moved on. The reason is easy. Just open this chart: https://fred.stlouisfed.org/series/MORTGAGE30US
Until the end of 2021 you could secure a 30 year fixed rate mortgage for just a tad over 3%. Apply for that same mortgage today and you are at 7.57%. So, the cost to borrow is 2 ½ times greater than 21 months ago. In real life terms, if you borrowed $500,000 the morning after ringing in the 2022 new year, a 30 year note signed today is going to consume $500,000 more of your money than it would have when 2022 began. As you might expect to happen, home prices have not yet fallen because many sellers don’t have to sell. But home sales are at their lowest point since 2011. If you are buying and need a $500,000 mortgage to swing the deal, your mortgage is going to be $3,500 a month + up to a $1,000 in school taxes and $150 a month to insure this vessel that you call “home.”
Because we don’t buy or sell homes every day, most of us don’t feel the shift. But the data is there to show it exists. The Philadelphia region where this writer lives is a bit more flexible. Philly is wedged between two very pricey markets in metro New York and metro District of Columbia. You can get a lot for your housing buck in contrast to those markets and Covid seems to suggest that you may be OK visiting the office mothership a couple days a week instead of daily. Thus, we have some buyers in our market who work in DC or NY and still see deals. But people selling in the divorce world need to respect how the buyers and sellers market is segmented. There are people being relocated or afflicted with personal or financial health problems. They need to buy or sell and sometimes their employers will help solve the problem with buy back or buyer assistance programs. Alas, the rest of the market is highly responsive to interest rates and high rates do thin the herd of buyers and can drive prices down.
People understand that real estate is a commodity. Yet they seem to think that their real estate is immune to market forces. Beginning in 2022 home mortgage rates really spiked, doubling during that year. At first, rates seemed to have no effect on rising prices and a home sale bonanza that hit its height during the pandemic seemed to have no interest rate headwinds. But the new data reported by the Wall Street Journal shows that high rates are driving buyers from the market over time. Existing home sales have fallen by one-third since the beginning of the year. The inevitable effect is that the buyer will begin to control a market the seller has dominated since March 2020.
If you own an existing home realize that with rare exceptions, you will not elude the effect of these forces. If you need to sell in the foreseeable future, now may be the time to list. Yes, you may lose the benefit of a low interest mortgage. But the love of your 3% mortgage may need to be tempered by the realization that prices could actually retreat. And yes, among the victims may be your house.