Rising interest rates is one of the big topics right now in real estate. I don’t know about you, but I find myself having rate conversations all the time, so I thought we could maybe kick around some thoughts. Anything to add?
5 things to consider about rising rates and values:
1) Duh, values will soften: Rising interest rates can affect the ability of buyers to afford higher prices because mortgages become more expensive (thanks Captain Obvious). Unless there is another factor to help prop values up, rising rates can naturally lead to softer values. To be fair though, let’s remember rates are not the only driving factor to make value go up or down in real estate.
2) Demand is strong enough: Rising rates can certainly impact affordability, but the interesting part to consider is we have a shortage of housing inventory. This means there is actually room for some buyers to completely leave the market (or be priced out) because there would still be enough buyers left to afford higher prices. On one hand I am very skeptical of articles that say rising rates will not impact buyers at all because that sounds like spin. Yet we do have to entertain the reality of demand being strong enough to a certain extent to deal with some rate increases without much value change (assuming modest increases of course).
3) The squeeze on lower-end buyers: In a market with rising rates, it’s buyers with less money that will be impacted the most because some buyers are on the brink of struggling to afford the market already. Thus an increase in interest rates that makes a $100 or $200 difference in a mortgage payment can be a very big deal for someone on a tight budget. Moreover, buyers with larger down payments simply have more power when making offers, negotiating, paying beyond appraised value, etc…. But before we start saying buyers putting less money down cannot play the real estate game, let’s look at actual stats. If you didn’t know, 25% of all sales last month in Sacramento County were FHA (very low down payment required) and nearly 29% of all sales under $400,000 went FHA. It’s easy to say things like, “Buyers without real money down are not winning in this market,” but the stats say otherwise.
4) Lenders getting creative: When rates rise it can put pressure on lenders to get more “creative” in their financing so more buyers can keep playing the market. In other words, lenders can help buyers artificially afford higher prices with newer and looser loan programs that compensate for higher rates. Part of me hopes lenders put movies like The Big Short and Inside Job in their Netflix queue just to remember how much power they truly have when it comes to making markets move. On a realistic level though, the lending market probably could loosen up a bit in a healthy sense since the regulation pendulum swung very far after the “bubble” burst. For anyone who has tried to get a loan recently, you know how rigorous and stressful it is. Simply put, getting a loan is not as easy as pushing a “rocket” button on a smart phone app.
5) Pressure to buy “before it’s too late”: Many buyers feel pressure to get into the market before rates get too much higher, and that’s a dynamic likely to persist throughout this year as discussions about rate increases ensue. It’s as if buyers feel like they have a small window of time to act before they are forever doomed and shut out of the housing market. What do you think of that? What advice or wisdom would you share with buyers feeling this way?
Questions: What is #6? How do you think rising rates will impact the market? Did I miss anything? I’d love to hear your take.
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Regarding #5 – Yes, there is a rush on right now to lock in a mortgage at today’s rates to avoid future rate increases. This in turn is pushing demand in the lower price ranges. But what is really happening is that future demand is being pushed forward to the present. That future demand will be diminished even further when rates do rise. Logically, as affordability becomes more tenuous, prices should decline until supply and demand are in balance again. But other factors such as an increase in real wages, strong economic conditions, or a loosening of borrower qualifications may offset some of the impact of rising rates and diminishing affordability. That is of course until the next big unforeseen disruption occurs. Real estate is cyclical and right now we seem to be riding the crest of the wave.
Thank you Tom. I appreciate your take and particularly like your thoughts on future demand being grasped right now in light of wanting to get in. The market is definitely different depending on the price range. The lower end in Sacramento has less inventory and higher value increases. This is not the same dynamic as the top of the market. I am finding some neighborhoods to be flat in value. Yet there are still several offers on properties. The thing is though there is a difference between the aggressive feel of the market because of strong demand and actual value increases. I just appraised a property in Placer County the other day at the $650,000 level and found this dynamic at play. The market under $400,000 in the neighborhood was definitely “hot” in every regard, but that wasn’t the case at this price point. While there were several offers on most pendings, the pendings were really trending at a very similar level compared to sales over the past 6-9 months easily.
Same dynamic here Ryan. Over $700k in Ventura County is very slow. Below $600K is very hot. In Montecito, where prices can be anywhere between $1M and $16 M, I have measured an actual decline in prices in the $5M+ segment. The below $5M market seems to be holding up. I’ll be doing a Q1 report on prices and inventory in my market areas after 4/1. It will be interesting to see how the different markets have done.
Thanks Tom. It’s interesting to hear about your market. I think some people say the top will lead the bottom, so as to say the slowness at the top will eventually catch up to the bottom of the market. Though others say it’s possible to have two different markets where values are soft or declining at the top and the bottom and middle have different trends. In my mind there is no one rule of how a market unfolds, but it is intriguing to watch and so important to pay attention to the sub-markets and how they are different and connected.
Ryan,
Good food for thought, as always.
Anyone who writes an article that states, “Rising interest rates will not affect buyers at all” is not, in my opinion, qualified to write on the subject.
We know buyer’s don’t qualify for the sales price; they qualify for the monthly payment; that’s why neg-am loans artificially inflated the price of properties a decade ago. 1-percentage point probably won’t move the needle much, but 2-percentage points might.
Of course, we’re back to the same old story that Sacramento is not creating significant jobs; our market is supported, to a large extent, by Bay Area people who can e-commute. That skews our local stats to some extent.
Keep up the great work. I always look forward to your blog posts.
Tom C.
Thank you sincerely Tom. I agree with you about the lack of job growth and it is a concern. We have a housing market with well-qualified buyers having purchased, yet the market is also built on artificially low interest rates. This is one reason why the market is very sensitive to rate increases. Though a minor increase doesn’t tend to sway value much. The irony here is the threat of increases can create more demand too, which we always have to consider.
I always appreciate your take. Thanks for the kind words too.
I agree with you on #2 Ryan. It’s difficult to believe that with rising rates AND limited inventory that buyers would not be impacted. Keep up the great work and congrats on all your recent speaking engagements.
Thank you Tom. And by the way, I think this is a Tom record. Three Toms in a row have commented. I’m loving it. It’s been fun to speak a bit more lately, though three presentations this week pushed it a bit (overbooked in my world). Congrats to you for the quote in Valuation Review recently too.
Love the post Ryan. It seems like everyone is always saying mortgage interest rates are going to go up. They go up about a percent and then they don’t continue. We are up to almost early 2014 levels now, so maybe this time rates will actually go up. We cannot continue on this path of almost free money forever.
I hear you on that. The Fed saying there will be rate increases is a bit like the parent who promises consequences but does not follow through. Yet there is more definitive talk now about expected rate hikes during the next two Fed gatherings. But then again they could just be putting out feelers to see how the market responds and then scale back if we are not healthy enough for the hikes. We are back to 2014, but we are also higher than 2015 and 2016. We are still incredibly low though.
I agree with you we cannot continue on this path. It’s like a drug addiction and we’ll see how well we can taper off and how long it takes to do so. Our market has been built in large part by historically low rates, so I would suspect any rate increases would happen very slowly.
Ryan, I concur with the comments I have read here. You definitely have a sharp group following you. I might add for a #6 would be changing demographics. Aging Boomers vs Millennials and the effects both groups are creating for the housing market. I would be curious of your thoughts.
Thank you Dennis. I completely agree about the comments. They absolutely make the post better. There is some real insight here.
It’s going to be interesting to watch how both of those groups play the market. There are definitely Boomers who need to downsize. My parents actually did just that recently. It’s a reality of the market. I just spoke in a real estate office recently where the agents were talking about targeting these sorts of sellers/ buyers. There is a development in Midtown called The Creamery and quite a few of the buyers in there are actually an older demographic instead of who one might think would be buying in Midtown. I sat on a panel recently with the builder of that development and it was intriguing to hear about Boomers downsizing to Midtown because we like to think it’s only young people wanting to be a part of the urban action. I know when I talk with Millennials, they seem hungry to buy. I think they get a bad wrap in so many ways though. Of course some do not want to buy (just like some in every generation), but many do. It’s just the economy and wages are not vibrant enough for some Millennials to pull the trigger right now. Student debt is also an issue. The irony to me is it’s so easy to target Millennials and say they are not interested in housing, but they have skyrocketing rent, insane student debt, astronomical healthcare costs, and sometimes less than stellar wages. This is definitely not what previous generations had to deal with, so we need to keep things in context and cut them some slack. Okay, that was a little sermon I fit in there, but I’m passionate about it. It seems we find ways to rag on every new generation and I’d rather not be a part of that club. Let’s find ways to encourage and support the next generation, bless differences, and challenge and learn from others too. Okay, sermon done. 🙂
Thanks for your insight.
Agreed on all your points Ryan. The Downtown scenario is much different than I would have imagined and there are always naysayers in every group. I myself, have learned it’s more productive be positive! Thanks for sharing your gifts
Dennis
Thanks Dennis.
I think one of the biggest influences on the Sacramento market is the huge influx of Bay Area money pouring into the area. The lower and middle class is getting squeezed out of the coastal market, and millennials are finally realizing they’re never going to be able to afford a home there. Boomers are also realizing they can sell their San Jose home for $1.5 million and come out here and buy something in Curtis Park, Land Park or East Sac with all cash and still have money left over to retire and live like a king.
So, when it comes down to it, we have a larger pool of buyers than normal because we have so many Bay Area residents making the move. It isn’t a case of just Sacramento area renters turning into buyers. This is a large part of what I believe is creating the super high demand.
Further, these Bay Area migrants will be less affected by rising prices and interest rates, as the money just goes soooooooo much further out here. $350k in the Bay Area will hardly afford you a 600 sq ft studio in the ghetto of Fremont, but you can come out here to Elk Grove and buy into one of the nicest neighborhoods in the area with great school districts and low crime for the exact same price.
So, I think interest rates and rising prices won’t affect us as greatly as if it were just Sacramento area residents in the market, but it will still definitely catch up with us eventually for all the reasons you mentioned.
Thanks Wes. I always appreciate your take. Money really does go far in the Sacramento region. Just think what even $1,000,000 can get you in the city or the country. There are some incredible properties. The truth is we have a real shortage of inventory and that is probably the most significant factor right now in the real estate game. If more listings hit the market, higher rates will become a bigger deal. If I’m not mistaken I think rates actually went down this week. This is a conversation to keep open for the next few years and pay attention to various facets of the conversation.