Interest Rates, the Stock Market, and the Real Estate Market…Oh My!
By Renee Cohen
June 16, 2022
I spoke with a lender yesterday who mentioned that interest rates, at that particular moment, were at 5.875% for a 30-year fixed mortgage. I told that lender that we haven’t seen rates that high since my husband and I bought our first house in 2002.
Couple the rapidly rising interest rates with the rapidly declining stock market and you’ll notice some significant effects on the real estate market. It’s not a complete 180 from the obscene multiple-offer situations and unimaginable over-asking sale prices we experienced three months ago, but it’s turning enough that buyers and sellers are both impacted.
image credit: bankrate
What are these effects on the market? First, the rising interest rates which directly affect affordability. This is especially pronounced for first-time buyers and those buyers in the lower-end price points. A higher interest rate means a buyer’s buying power will be less and they will be paying more in interest per month than they would have a couple of months ago when rates were still in the 3% range; if buyers are trying to keep their target monthly payment to a certain amount, in order to account for the increased interest they now have to factor in, they will need to lower the price point of the homes in contention.
When sale prices were increasing exponentially, many buyers were feeling the pressure with respect to affordability from a pricing perspective. Now that interest rates are higher, those buyers who were on the cusp of their buying power when the rates were lower are finding themselves priced out of the market due to the combination of high sale prices and high-interest rates.
Along the same lines, there is a segment of the market that is not as impacted by interest rates as they are by the performance of the stock market. The upper-end buyer who has financial assets and is more likely to pay cash for a home isn’t as concerned with the nuances in interest rates, but they are concerned about their portfolios which currently are getting pummeled. Many of these buyers – who were banking on tapping into their portfolios for their purchases – are rethinking their purchases due to the volatility in the market.
The changes facing buyers have implications for sellers, too. Three months ago, sellers listed their homes and within minutes – sometimes even prior to listing – they had buyers lining up to submit outrageous offers. Prices rose exponentially and inventory didn’t last long enough on the market to even be included in the statistics. Now, however, the market looks a little different. Whereas any given property previously had 60+ showings and 15+ offers in less than a weekend, now similar properties are seeing 20+ showings and somewhere between one to three offers, and in some cases, no offers in that same time period. It’s no longer a given that homes will sell in the first weekend, and many are languishing on the market for several weeks.
Image Credit: Axios Denver
Additionally, price reductions have reemerged in the market. For those homes that do not sell in the first weekend, by the end of the second week on the market, many have taken a price reduction. It’s not unusual to see multiple offers occur after a price reduction, especially if the price reduction puts the property in the correct range where it needs to be to sell, but it’s the price reduction that seems to generate the offers.
What are the takeaways for buying and selling in this new environment? Buyers need to reach out to their lenders to run lending scenarios to make sure they are comfortable with the numbers at the new interest rates. Pre-approvals have always been important, but in the new lending climate it’s that much more crucial that buyers know what they are getting into from a lending perspective before they make offers on homes. Sellers also need to understand their numbers, but their numbers relate to pricing and pricing their properties appropriately for the market. Furthermore, they need to be realistic about how the market has changed and have realistic expectations for how many offers they will likely receive once they go on the market. It’s not a bad time to be in the market and it’s possible to be successful in the market as either a buyer or a seller, but understanding the current market climate is the key to that success.