Many factors have contributed to the historic sellers market which has lasted throughout the pandemic, which has seen house prices increase by more than 50% in two years in some states. One of the main drivers of this growth has been very cheap mortgage rates.
“The low interest rate environment has created an unprecedented opportunity not only for buyers who are getting a great rate, but also for homeowners who are seeing the value of their homes increase exponentially,” said Bill Gassett, founder of Maximum real estate exposure.
However, the environment that made this dynamic possible all these months is slowly fading.
“While housing markets don’t change overnight,” Gassett said, “chances are that with the Fed raising rates several times over the coming year, Real estate markets eventually change.”
Rates are rising and the market is changing. Here’s what that means for sellers.
Buyers can’t afford so much home
Make no mistake: mortgage rates are rising in 2022 — and they’re rising fast.
“Only last week, the 30-year mortgage rate was 4.16%,” said WeLoans CEO Lucia Jensen. “In just one week, the rate jumped to 4.47%, representing a jump of 0.31% in seven days.”
Each additional basis point on the interest rate lowers the amount of money buyers can borrow – and therefore reduces the amount of home they can afford.
“In effect, the increase in mortgage rates reduces the purchasing power of conventional buyers from 9% to 10% to 11%, pending their debt-to-equity ratio,” said Baron Christopher Hanson of Fine properties of echo. “Buyers pre-approved for mortgage financing of $500,000 to $1 million may see their buying power reduced by $45,000 to $110,000 due to rising mortgage rates. This cooling of traditionally funded buying power at all levels is ultimately putting pressure on sellers hoping to hit top dollar on their homes.
When buyers can’t buy as much, demand drops
On March 18, the National Association of Realtors announced that home sales fell 7.2% in February – much more than expected – to a six-month low. Although it is too early to diagnose a definitive cause and effect, it is impossible to ignore that the rise in rates immediately preceded a sharp drop in demand.
“Current mortgage rates make buying a home less affordable,” said Adrian Brikho, Senior Mortgage Advisor at Brik mortgages. “Buyers who were close to qualifying are going to be forced out of the market. We are going to see a slowdown in demand in the coming months, which will affect the price a seller can get for their home.
When demand drops, sellers have to lower prices – usually
Rising interest rates reduce demand; and, when demand falls, so should prices.
“It’s important to remember that there is a consistent correlation between interest rates and home prices,” said Ward Morrison, President and CEO of Currency Franchising, LLC. “When interest rates rise, the affordability of buying a home decreases, causing a backlash in home valuation. To offset this problem, the market stabilizes and home prices fall.
This pattern is what you might expect in a normal year, but 2022 is not a normal year.
“Fortunately for home sellers,” Morrison said, “because real estate supply and demand are so out of balance right now, we probably won’t see prices come down as quickly as they have in the past.”
Demand could rise before falling for real
Many experts expect demand to pick up momentarily before falling back. You can assign it to the FOMO buyer.
“In the current climate, with the expectation that interest rates will continue to rise, and with interest rates remaining low relative to historical background, I think the desire to lock in interest rates down will only create a greater sense of urgency,” said Michael Rehm, a licensed realtor in Sacramento, California. “This will encourage more buyers to leave the sideline and enter the market, which will only increase demand and house prices overall, which will benefit sellers in the current market.”
Sellers should expect more headaches from empowered buyers
As rates rise, demand slows and prices fall, the balance of power will slowly shift from seller to buyer – and buyers will soon be able to make demands that would have kept them out of the race during the scorching days of the 2021 bidding wars.
“Rising mortgage rates will also temper the volume of buyers willing to forego inspection periods and invest 4% to 6% to 8% of the home’s appraised value in hit-list improvements that sellers may have been unaware during the COVID real estate buying spree,” Hanson said.
Sellers are also likely to be frustrated with buyers who were pre-approved based on numbers the lender calculated before interest rate hikes.
“As interest rates rise, home sellers must also consider the buyer’s ability to afford a home and ensure their mortgage pre-approval is based on current interest rates,” Morrison said. “It’s crucial; because, if a seller accepts an offer from a buyer who was pre-approved at a lower rate and is no longer eligible, that is valuable time and money wasted on the transaction.
“To avoid this, it’s wise for sellers to work with a buyer who has lending options — like a mortgage broker, for example, who can shop around on the buyer’s behalf to offer a variety of options.”
Most sellers will have to become buyers themselves
The most important thing for sellers to remember is that unless they have a spare home, they become buyers when the deal closes.
“I hear more and more current owners say, ‘I could sell, but what could I buy? I couldn’t afford to buy my own home in this market,” said Matthew Posey, residential mortgage originator with Axia real estate loans. “The current real estate balance tilts firmly in favor of the seller and not the buyer. The net benefit to a seller buying another home is diminished when the balance tips too far one way or the other. This is why housing market professionals, myself included, always prefer a balanced market where both buyers and sellers benefit.
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