By K. Diane Bowers, realtor, GRI
J&B Real Estate, Inc.
What is going on with these interest rates? Let’s discuss the impact of the “higher” interest rates on buyers and sellers.
Why Did the FED Increase Interest Rates?
The FED (Federal Reserve) scheduled interest rate increases in an attempt to battle inflation. In layman’s terms, to try to calm down higher prices. When it comes to real estate, to slow the crazy high appreciation on housing that is caused by very low inventory. When this happens, it’s been a common practice by the FED to increase interest rates in an effort to eventually balance prices and re-ignite a competitive buyer’s market.
What Do I Think of This Strategy?
I need to preface this by saying that my response is based solely on MY OPINION of what I am experiencing in the current market versus my 20 years of expertise. Based on the competitive market conditions over the last couple of years, things were not sustainable, so increasing rates to slow the market, I support. My biggest issue with this rate increase schedule was the dramatic impact it had on my hard-working buyers in a very short period of time. It was not fair because it hurt those already hurting from high inflation prices on everything else: the working class!
In reality, there are a ton of cash investor buyers in the current market; interest rates have practically no impact on them (some use lines of credit outside the transaction that are short-term impact). Therefore, I am not sure the increased interest rates will have the final resolution the FED expects.
How Has This Impacted Buyers?
I touched on this above, so let me give you an example. I have been working with a young family since January who are looking to buy a small home in Frederick County. They are pre-approved with a lender for roughly $360,000 (depends on taxes, etc.), but have been “outbid” on so many homes due to the low selection of homes available in their specs. Now, on top of getting pushed out of more and more homes due to drastically increasing prices, they are saddled with outrageous increases in their interest rate.
A house in March of this year at $325,000 had a mortgage payment of roughly $1,732 (PITI 3-3.5%); that very same house this summer had a mortgage payment of roughly $2,311 (PITI 5-6%)—that is a $579 monthly difference! I have several buyers that have decided to put their home ownership on hold until the economy cools down. This part makes me very sad. One of the most important reasons I do what I do is for the pride in home ownership. It is hurting the wrong people and is very frustrating for me.
How Has It Impacted Sellers?
It hasn’t had as much of an impact on sellers, but it will very soon. Sellers will need to be more cautious with their pricing, condition of home, inspections, flexibility, etc. This is not the time to “test the market,” so trust your Realtor! If they recommend $350,000, do not list for a dollar more! Any home listed longer than 30 days gets snubbed by buyers (unfair I know, but it’s true). That home will most likely take a little longer to sell, and they most likely will not get 10-20 offers like their family/friend did six months ago. Sellers may even need to have price reductions. Showings will be fewer. Prior to May, I would prep my sellers to leave Saturday and Sunday due to the overwhelming number of buyers (20-40) scheduled to see their home. There are still plenty of sellers getting multiple offers within the first 24-72 hours on market, but to be quite honest, there sometimes seems to be no rhyme or reason to it. We still have limited inventory. Yes, it’s slightly better than it had been, but nowhere near a healthy level. There have been more buyers canceling contracts than ever before, so don’t bank on anything until you are walking away from the settlement company with a check.
Overall, Are They Bad?
Absolutely not! It’s just sticker shock like everything else since the pandemic. Still, it makes me mad to buy something at the store that is now $6.00 that was only $3.00 just two years ago—but, I’m still gonna buy it.
I bought my first house in 1999 at roughly 7% interest rate, which is still a good rate. It is all about perspective. I advise all of my current buyers to plan to refinance in two to three years when the economy and pandemic aftermath have calmed down. There are three more FED meetings scheduled for 2022, with expected rate hikes. Just prepare your budget accordingly. To be honest, what’s the alternative? The rental market is even more outrageous and competitive. Purchasing real estate is always a great investment!