With the Fed’s recent policy announcement that rates will raise and bond purchases will decrease quicker than previously expected, mortgage rates have jumped to new 2-year highs, rising above 3.7% for a 30-year, fixed rate mortgage. The question is, how does this impact our real estate market?
We addressed this question a few weeks back during a live stream interview (you can watch the interview HERE), so let’s dive in a bit deeper to look at the key factors that could drive change in our market.
When we measure the market, we look at three key factors:
- The job market and local employment forecast
- Interest rates and how they impact buyers
- Affordability and housing prices
With rates continuing to increase and prices rising drastically over the past year, two out of those three key factors are now working against buyers, suggesting that change is on the horizon.
First, let’s look at the impact of rising interest rates. Simply put, the continued increase in rates results in less purchasing power for buyers in the market. Generally speaking, an increase in mortgage rates of 1% equates to roughly a 10% decrease in purchasing power.
For example, a buyer that had a $500,000 budget at last January’s rates may now have a $450,000 budget at current rates, all else being equal. Should rates rise another percent, that number drops to $405,000.
Next, let’s look at affordability. Prices for single family homes in our market have increased by 19.3% year-over-year, driven by high demand and low inventory. What this has created is a moving target for buyers in which they are consistently having to realign expectations with how much home they can afford.
We’re already seeing the impact of these changes, with the average number of contracts written per week for this January down 22% compared to last January.
A strong job market and continued relocation to our area will bolster demand, which means we don’t expect growth to stall entirely, yet the combination of the two factors highlighted above supports our previous prediction that home value growth will slow down in the months ahead.
What does this mean for buyers?
For buyers, if you are in a good position to buy, now is the time. A common objection we hear from buyers is that they are planning to wait things out for prices and/or rates to drop. This is usually tied to the hope of getting a deal on a home similar to what they could have gotten in the past, or fear that we’re on the verge of a bubble rivaling what was seen in 2008.
It’s understandable to not want to make a bad investment and the last thing we want for our clients. The reality is, prices are still expected to rise with inventory remaining low and history tells us they will continue to do so in the long term. There are also no guarantees that interest rates will drop to the historic lows we saw last year any time soon.
Nationwide rent prices have risen as well, at 21.3% and 16.7% respectively for one and two-bedroom apartments. This means you’re simply paying more money toward someone else’s mortgage when you could be building that equity for yourself.
Regarding a bubble, the DFW area saw an 11% decrease in prices during the 2008 crash (well below the national rate), and laws have been passed to address the practices that fueled the crash, which means the threat of foreclosure is nothing like what we saw back then.
If you’re considering buying, we would love the opportunity to sit down with you and learn how we can help you achieve your goals. You can visit our Buy page and fill out the form to help us build a team that will meet your needs, or call us directly at 214-267-9222.
What does this mean for sellers?
Price growth is expected to continue in 2022, yet increasing interest rates will eventually offset the benefit of growth for sellers. We’re recommending to our sellers that they go on the market now, rather than waiting. This will help maximize exposure with serious buyers looking to make a purchase before rates increase again.
This will also help sellers to take advantage of current rates to purchase their next home, resulting in savings on top of the ability to sell for top dollar. Our Cash Purchase Program also allows sellers to buy their next home in cash before their current home sells, further maximizing their ability to win on both sides of the transaction.
If you would like a free comparative market analysis on your home, visit our Home Valuation page, share some details about your property, and our team will be in touch to discuss our findings. You can also call us directly at 214-267-9222.
As we continue on into 2022, we’ll continue to keep a close on these factors and more so that you can be ahead of the curve when the time comes to make a move.