Financing
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Well, I Suppose This Was One Way To Revive The Market For Future Mortgage Refinances? |
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Sorry. Bad joke. Probably too soon. Mortgage interest rates have risen even further this week... with the current average rate on a 30 year mortgage now at 6.7%. One year ago it was 3.01%. Also one year ago, some said that every last person who could ever possibly think about refinancing their mortgage certainly must have done so. But now it seems some buyers are likely entering into fixed rate mortgages at rates that are high enough that they will be planning to refinance sometime in the next few years with the assumption that at some point we won't be looking at 6.7% interest rates any longer. I suppose it is also important to note that a 5/1 ARM is currently at 5.3%, which might be a MUCH better option for some home buyers. This mortgage interest rate would stay level at 5.3% for five years, and then have the potential to adjust once a year each year thereafter. It's a topsy-turvy time in the mortgage world right now, which can impact the home buying world, which can impact the home selling world. The steady increase in mortgage interest rates has certainly affected housing affordability, especially when piled on top of higher home prices. | |
Will A 6% Mortgage Interest Rate Seem High After A Year Of 6% Rates? |
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Many (though not all) home buyers in the market today have been shopping for homes for the past three, six or 12 months. As such, when they encounter today's mortgage interest rate of around 6.25% they find it to be high. Quite high! After all, six months ago, the average 30 year fixed rate mortgage interest rate was 4.25%... and a year ago, the average rate was a touch below 3%. So, of course, a 6.25% mortgage rate seems high compared to 4.25% or 3%. But... fast forward a year... if mortgage interest rates have remained around 6% for a full year, will they then stop seeming and feeling high? Clearly, a 6.25% mortgage interest rate a year from now will still result in the same mortgage payment as a 6.25% mortgage interest rate does today... but perhaps that payment (and that interest rate) will no longer be viewed in the context of what could have recently been... at 4.25% or 3%. Of course, I'm hoping mortgage interest rates don't really stay this high (around 6%) for a full year, but if they do, maybe they won't seem quite as high to home buyers a year from now. | |
I Was Going To Upgrade To A Larger Home Until I Saw That Larger Mortgage Payment!?! |
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In more than a few conversations over the past week I have been chatting with friends and past clients who have shared that they had been recently toying with the idea of upgrading to a larger home. In each of these instances, they bought their home three to eight years ago and are now finding it to be a bit tight in various areas. A new kid (or two) stretching the bedroom usage... working from home part of the time with limited space in which to do so... older kids with friends coming over to hang out and wanting room to lounge, etc., etc. These various "life is changing and house needs are changing" situations prompted each of these homeowners to think about whether they ought to upgrade to a larger home. But... then they started running the numbers. At first, things look good... They bought their current home for $300K, have a mortgage payment of around $1600/month, they still owe $250K and could sell for $415K. Thus, they could walk away with about $140K after settlement. But then, things turn a bit... The larger home would cost them around $540K. They'd put $140K down, so they'd be financing about $400K. At current mortgage rates of around 6%, their monthly payment would be... $2900/month. As you can see from this rough math for this one homeowner's situation, even though their $300K home is now worth $415K, and even though they would be walking away with $140K after selling, and even though they'd only be upgrading from a $415K home to a $540K home... their mortgage payment would be jumping up from $1600/month to $2900/month. The big change here is, of course, the mortgage interest rate. Paying off that 3.25% mortgage and taking out a new 6% mortgage is going to cost ya! What does this mean for homeowners and our local market? I suspect there will be fewer elective home upgrades over the next few years if interest rates remain this high... which has the potential to further limit resale inventory of homes for sale. This story is not everyone's story... so if you're considering an upgrade (or a downgrade) let me know if you'd like to do some rough math together to evaluate the overall financial impact of making the change. | |
Mortgage Interest Rates Double Within A Single Year |
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Well, then. A year ago, the average 30 year fixed rate mortgage interest rate was under 3%. Today, the average 30 year fixed rate mortgage interest rate is 6.02%. Yikes. Clearly, this affects mortgage payments rather significantly. Now, to create at least a bit of context... [1] Nobody really thought 3% mortgage interest rates were normal or sustainable. They were great, of course, for home buyers... but I don't think anyone really thought they'd stick around for as long as they did. [2] In some ways a buyer's monthly housing costs were held abnormally low by those abnormally low mortgage interest rates. So, while monthly housing costs have increased significantly over the past year given this shift in interest rates... it wasn't really from "normal" to "high" - it was more of from "low" speedily through "normal" and then to "high" today. [3] The last time this average 30 year fixed rate mortgage rate was above six percent was back in 2008. It's been a bit. Will mortgage interest rates continue to rise? Will they hover around six percent? Will they drop back into the five point something range? Stay tuned to find out. In the meantime, some home buyers today are opting for an adjustable rate mortgage instead of a fixed rate mortgage. The average rate for a 5/1 ARM is currently 4.93%. This type of mortgage product will keep that 4.93% rate for five years and then can adjust once per year thereafter. | |
Do Home Prices Rise As Interest Rates Fall, And Fall As Interest Rates Rise? |
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Q: Do Home Prices Rise As Interest Rates Fall, And Fall As Interest Rates Rise? A: Sometimes In the graph above I tracked the median sales price of single family homes sold in Harrisonburg and Rockingham County over the past 20 years (blue line) as compared to the average mortgage interest rate (orange line) to try to answer the question above. I then looked for years where there was a significant increase (or decrease) in the median sales price paired with a significant decrease (or increase) in the mortgage interest rate. I found 7 years where this happened... out of 20 years. There were also plenty of years where the two metrics tracked alongside each other in the same direction... prices fell while rates fell... or prices rose while rates rose. So... it does not seem that a decline in rates is likely to necessarily result in higher prices... or that an increase in rates is likely to necessarily result in lower prices. Though, of course, sometimes (not usually) that does happen. The question is asked, of course, in the context of rapidly rising mortgage interest rates. The answer we are all seeking, of course, is whether these higher rates will result in lower sales prices. History does not indicate that will definitely happen, but it is certainly possible given how higher mortgage interest rates affect how much a buyer can pay for a house and how many buyers can qualify to buy any given house. | |
Happy Mortgage Interest Rate News As Average Rate Falls Below 5% Again |
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Mortgage interest rates have been steadily climbing for most of the past six months -- peaking at 5.81%. But... in a bit of good news for buyers in today's housing market... the average mortgage interest rate (for a 30 year fixed rate mortgage) has fallen below 5% again... barely... to 4.99%. Just over a month ago with rates nearing 6%, some were thinking we were going to see them continue to rise to 6%, 7% or beyond. This moderation in rates is certainly helpful for home buyers looking to buy a home right now! | |
Do Inventory Levels Rise (and fall) With Mortgage Interest Rates? |
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Q: Do Inventory Levels Rise (and fall) With Mortgage Interest Rates? A: Sometimes Interest rates are on the rise right now... and inventory levels are rising as well. Interest rates were falling for quite a few years just prior to 2021... and inventory levels also fell during that timeframe. So... do inventory levels just track right along with mortgage interest rates? Sometimes, but not always, it seems. Of note... The graph above shows a 12 month average of the number of homes for sale (blue line) and a 12 month average of a 30 year fixed rate mortgage interest rate (orange line). So, the last data point (June 2022) is showing the average number of homes for sale in the 12 months prior to and including June 2022... and the average mortgage interest rate in the 12 months prior to and including June 22. Looking back, then, to the beginning of 2015, we can see four general trends taking place, three of which I have labeled. [0] The unlabeled portion of the graph (2015-2016) showed very little upward or downward movement in inventory levels or interest rates. [1] Between 2016 and 2018 we saw interest rates rising, but inventory levels falling. This runs counter to the premise proposed above, that inventory levels rise and fall as interest rates do the same. [2] Between 2019 and 2021, indeed, interest rates declined, and inventory levels did as well. [3] Since late 2021 we have seen interest rates start to climb (and even faster and further in 2022) and inventory levels have started to climb as well. So... yes, there seems to be some connection between interest rates and inventory levels... at some times... but not always. The unspoken here, is the main connection between these two factors... which is home buyers. As interest rates decline, in theory there are more buyers, which would in theory, cause inventory levels to decline. As interest rates rise, in theory there are fewer buyers, which would in theory, cause inventory levels to rise. Beyond all of these theoretical connections and consequences, what does this mean for 2022 and 2023 in our local housing market? So long as interest rates are rising, there is a decent chance that inventory levels will rise somewhat as well, as some buyers won't be able to afford some houses any longer... or will choose to limit their home buying budget. The big question, of course, is whether it will be a four part chain reaction... [1] Interest Rates Rise [2] Fewer Buyers Buy Homes [3] Inventory Levels Rise [4] Prices Flatten Out or Fall Thus far in our local market, we are seeing... [1] Interest Rates Rising [2] More Buyers Buying (not fewer as predicted above) [3] Inventory Levels Rising (slightly, not significantly) [4] Prices Are Still Rising (not flattening out or falling as predicted above) Do keep in mind that every housing market trend you see in the national news may or may not actually be representative of what is happening in our local market. | |
Increased Mortgage Interest Rates Can Significantly Decrease Your Home Purchasing Power |
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If you have $2,000 per month in your budget for your mortgage payment, that budget won't allow you to buy quite the same house now as compared to six months ago. Six Months Ago = 3.22% Mortgage Interest Rate = $451,000 house Six months ago, you could purchase a $451,000 house in the City of Harrisonburg, put 20% down, finance the purchase with a 30 year fixed rate mortgage at 3.22%, pay your tax bill and homeowners insurance all for a smidge less than $2,000. Today = 5.81% Mortgage Interest Rate = $353,000 house Today, you can purchase a $353,000 house in the City of Harrisonburg, put 20% down, finance the purchase with a 30 year fixed rate mortgage at 5.81%, pay your tax bill and homeowners insurance all for slightly less than $2,000. $98,000 of Purchasing Power... Gone! As such, if you have a fixed budget for your housing costs, you have lost $98,000 of purchasing power over the past six months given the increased interest rates. But Remember... Six months ago, plenty of buyers with a $2,000 budget may have been buying $353K houses... not $451K houses... so for some buyers the increased monthly costs are likely painful, but may not change their purchasing decisions. -- This article was inspired by an even more thorough analysis of this dynamic over here. | |
Will Mortgage Interest Rates Decrease Again, Somewhat, In The Next Few Years, Allowing 2022 Home Buyers To Refinance? |
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It's an interesting question that I have discussed with several home buyers lately. The economy is on a tear... inflation is rampant... housing markets (including our own) are seeing double digit per year increases in sales prices. One action that the Federal Reserve is taking to combat these factors is to raise interest rates. Mortgage interest rates are now approaching 6% -- after having started the year just over 3%. Wow! But... if the rates have risen this high to get things (the economy, inflation, housing markets) to cool off a bit... if/when they do, will interest rates eventually decline again? I don't know that they'll ever go back down towards 3%, and maybe not 4%... but is it possible within the next few years that we will see mortgage interest rates of 4.5% or 5%? It seems possible? I certainly won't say that it is likely, but it is certainly possible. This possible future reality is providing some residual comfort to home buyers who are going ahead and buying in 2022. They can afford the mortgage payments at the current rates of close to or at 6%, but they'd love to be paying a lower mortgage payment for their home at some point in the future. If their theory holds true... perhaps we will see interest rates eventually decline, somewhat, allowing 2022 home buyers to refinance to take advantage of future lower rates. Clearly, there is no guarantee that this will happen... but it does seem possible. | |
Mortgage Interest Rates Have Been Trending Back Down A Bit |
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After soaring from 3.2% in January 2022 to 5.3% in May 2022, mortgage interest rates have actually started to level off and even decline in recent weeks. The graph above shows the average 30-year fixed rate mortgage interest rate each week for the past year. Clearly, rates have been rising quickly for the past four to five months... but if you look at the past four weeks, you'll see a different trend. May 12 = 5.30% May 19 = 5.25% May 26 = 5.10% June 2 = 5.09% It is certainly encouraging to see mortgage interest rates leveling out a bit with the potential for sticking right around 5% in coming weeks and months. Certainly, I'd rather today's buyers were able to obtain a 3.5% or 4% mortgage interest rate if possible... but given the possibility of 5%, 5.5%, 6% or even higher, something right around 5% sounds just fine! | |
Monthly Cost Of Median Priced Home Jumps Much Higher In 2022! |
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Wow. The monthly cost of a median priced home has jumped quite a bit in 2022! This is related to a variety of changes between 2021 and 2022... [1] The median sales price increased from $270,000 to $296,500. [2] The average mortgage interest rate increased from 2.96% to 4.27%. [3] The City real estate tax rate increased from $0.90 to $0.93. All of these factors, combined, resulted in a rather significant increase in the monthly cost of a median priced home in our local market. | |
Reflecting On Large, Fast Changes In Mortgage Interest Rates |
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For at least the past five years, I have remained convinced that mortgage interest rates would start rising... anytime. But month after month, year after year, interest rates did not rise... instead, they fell. But 2022 has been a bit different. If you had asked me anytime in the past five or ten years what would happen if mortgage interest rates increased from 3% to 5% in the course of just four months, I likely would have told you that the market would likely immediately and significantly slow down... not to a screeching halt... but certainly to a slower pace than before that enormous increase in mortgage interest rates. But, here we are, on the other side of rapidly increasing mortgage interest rates for the past four months, and the market seems to still be, doing pretty similar things to what it was doing before mortgage interest rates started rapidly climbing. Homes are still going under contract very quickly. Buyers are still often competing with multiple offers, including escalation clauses and waiving contingencies. Prices keep climbing. So, have the rising mortgage interest rates had any impact at all on our local housing market? I'd say yes. 1. Some would-be home buyers are no longer able to afford the homes they would like to buy. 2. I think some homes might be receiving two or three offers now instead of six or eight that they might have received before. 3. Some would-be sellers might not be selling after all as they see how their buying budget will be affected by higher mortgage interest rates. So, there have been changes in our local market as a result of these rapidly rising interest rates, they the higher rates have had a much narrower impact than I would have assumed in years gone by. One other point of trivia... the last time the average mortgage interest rate was 5.25% (or higher) was... way back in August 2009... almost 13 years ago! | |
Folks Who Bought Homes In 2020 or 2021 Might Stay In Their Homes Longer Than Expected |
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Did you buy a home in 2020 or 2021? I'm betting you might stay in that home longer than we might otherwise expect. After all, who would want to give up that fixed mortgage interest rate that is SOOOO low! For nearly all of 2020 and 2021, the average mortgage interest rate on a 30 year fixed rate mortgage was below 3.5%. That is LOW. For some months during that two year period, the rate was lower than 3%! When home buyers from 2020 or 2021 think about selling five to seven years from now, I'm guessing a part of the though process of whether to sell will relate to whether they really want to give up that super, super, super low mortgage interest rate! Mortgage interest rates are currently hovering around 5%, and perhaps they'll stay there for much of the year, and beyond... If, seven years from now, you would potentially be selling and paying off a mortgage with a 2.75% interest rate... in order to take out a new mortgage with a 5.25% interest rate... will you really want to do it? Certainly, our needs for housing (location, size, configuration, etc.) change over time... and that might supersede a desire to hold onto that fantastically low mortgage interest rate. All that said, if you were fortunate enough to buy (or refinance) in 2020 or 2021, enjoy that super low interest rate, as it doesn't seem likely that we will see them anywhere near that low in the coming months and years. | |
If You Hope To Buy a Home and Have Not Talked To Your Lender Lately, Do So NOW! |
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So, you've been planning to and trying to buy a home for the past four months... but despite having made multiple offers, nothing has worked out yet. This is not as uncommon as you might think -- there still seem to be many more buyers in the market as compared to sellers -- and thus, plenty of would be buyers haven't been able to convert themselves into actual real life buyers yet. As a conscientious and responsible buyer you likely talked to your lender before you started your home search -- four months ago -- and you became pre-approved for a loan. Good work! But... wait.... if you haven't talked to your lender since then... connect with them again ASAP! Why, you might ask? Because interest rates have increased quite a bit over the past four months! Buying a $400K house four months ago with 20% down...
Buying a $400K house today with 20% down...
As you can see, this fictional buyers would now be paying $381 a month more than anticipated because interest rates have risen quite a bit over the past four months. The buyer very likely can still afford the new mortgage payment and will still be pre-approved to buy the house of his or her dreams... but the payment will be higher than expected, and nobody likes surprises. So, if you are in the market to buy and haven't talked to your lender lately to get an updated estimate of your mortgage payment with today's rates... do so NOW! | |
Current Mortgage Interest Rates in the Context of the Past Decade |
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Mortgage interest rates keep on rising. The graph above shows the average mortgage interest rate over the past decade. Periods of Green = 3._% (somewhere between 3% and 4%) Periods of Red = 4._% (somewhere between 4% and 5%) Periods of Blue = 2._% (somewhere between 2% and 3%) A few resulting observations... [1] We're getting ready to pop over 4.75%, it seems, which we've seen once (for a few months) in late 2018. [2] We might be headed all the way up towards 5%, which we haven't seen at all in the past ten years. [3] While we've spent most of the past decade below 4% (green+blue) we have certainly also seen long spells above 4% (red) as well. [4] We moved pretty quickly from 2._% to 3._% to 4._% and it almost seems like 5._% could be knocking on the door. As mortgage interest rates rise, monthly mortgage payments (for new buyers) rise, which certainly creates the possibility that at some point rapidly rising home prices won't be rising quite as rapidly. | |
If Higher Mortgage Interest Rates Will Cause The Market To Shift, It Does Not Seem To Be Happening Yet |
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In theory, as mortgage interest rates increase, some buyers will be priced out of considering some homes that they would like to purchase. If enough buyers are priced out of being able to afford their preferred home, maybe we will see fewer offers on homes listed for sale. If there are fewer offers on homes offered for sale, then perhaps buyers won't keep having to pay so much over the asking price. If buyers aren't paying so much over the asking price, maybe the 10% per year increase in median sales price in our area will start to move back to a more reasonable 3% to 4% per year. But, thus far, these are all just theories and possibilities, not actualities. Despite significant increases in mortgage interest rates over the past month (and 3 - 4 months) we don't yet seem to be seeing a decline in the amount of buyer interest in many or most new listings. I'll keep wondering if we will see that shift happening... and I'll keep crunching the numbers to see if there is evidence that it is happening... but if you are holding off on buying a home right now because you are absolutely certain that a shift is coming... it might be a long wait. | |
Rising Mortgage Interest Rates Are Causing Some Would Be Home Buyers To Adjust Their Target Purchase Price |
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Have you heard? Interest rates are on the rise. In early January, the average mortgage interest rate was 3.22% on a 30 year fixed rate mortgage. Last week, the average mortgage interest rate was 4.67% on a 30 year fixed rate mortgage. That is quite an increase!!! Here are two examples of how that might -- and might not -- affect buyers. Buyer 1 - Buying Below Budget Our first set of fictional buyers was planning in January to buy a $450,000 home in Rockingham County while putting 20% down as a downpayment. Here's how things were looking in January with a 3.22% mortgage interest rate...
Here's how things are looking now with a 4.67% mortgage interest rate...
As you can see, these buyers will have to pay $300 more each month because of the increased mortgage interest rates -- but, they were originally qualified up to $600,000 so the $300/month increase is annoying and frustrating, but does not change their plans to buy a $450,000 home. Buyer 2 - Maxing Out The Budget Our first set of fictional buyers was planning in January to buy a $350,000 home in Harrisonburg while putting 10% down as a downpayment. Here's how things were looking in January with a 3.22% mortgage interest rate...
Here's how things are looking now with a 4.67% mortgage interest rate...
As such, here's how things really look for them if they are maxing out their $1,725 per month budget given these new mortgage interest rates...
As you can see, these buyers had to reduce their budget from looking at houses priced at $350,000 down to houses priced at $305,000. That's quite an adjustment, especially when home prices are currently increasing by 10% per year. So, what does this mean for our market? All this is to say that some buyers will *definitely* be affected by these rising interest rates -- finding themselves no longer able to buy the home they hoped to buy, or needing to lower the price point of houses they will be considering. At the same time, however, some buyers will still be able to afford to buy the same houses they had planned to buy -- though their monthly housing costs for having done so will certainly be increasing. If, in our local market, most buyers were maxing out their home buying budget, and thus now have to buy less expensive homes, that could cause values to stop increasing, or even to start decreasing. What is not clear is how many buyers in our local market were maxing out their home buying budget and how many had room to increase their monthly mortgage payment if needed. | |
As You Might Expect, Most Home Sellers Are Not Providing Closing Cost Credits These Days |
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Sometimes a home buyers doesn't have all the cash on hand that they need for both a down payment and the closing costs. In that situation, sometimes a buyer might propose a higher sales price with the seller providing a closing cost credit at settlement. For example... instead of the buyer paying $240K for the house, they could pay $245K and the seller would give them a $5K credit back at closing. But... these days... that isn't happening as often. Three years ago sellers were giving closing cost credits to buyers in nearly half (46%) of all home sales in Harrisonburg and Rockingham County. These days, it is only happening about one in four times. Why might these types of transactions (with closing cost credits) not be happening as frequently right now? First, many or most sellers seem to gravitate towards buyers who have the strongest financial position (largest downpayment) as that is often an indication that they will be more likely to make it successfully through the contract contingencies (inspection, financing, appraisal) to settlement. Second, artificially increasing a contract price in order to have part of your closing costs included in that contract price will most often raise the bar as far as the the price for which the house will need to appraise. If presented with a $240K offer and a $245K less $5K offer, nearly all sellers will choose the $240K offer so that the house only has to appraise for $240K and not $245K. So... if you need a closing cost credit when buying a home... that's fine, it's still happening sometimes... but not nearly as frequently as it was in the recent past. | |
Average 30 Year Mortgage Interest Rate Rises Almost A Full Percentage Point In A Year |
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About a year ago, on February 11, 2021, the average 30 year fixed mortgage interest rate was 2.73%. A few days ago, on February 10, 2022, the average rate was 3.69%. So, yes, rates are rising, which means mortgage payments are rising for anyone who is not paying cash. In other words, for most home buyers. For example, if you were financing 90% of your $300K purchase...
But if you were buying a $300K home a year ago, given roughly the 10% increase in the median sales price over the past year it would be a $330K home today. So it's really more like...
The cost of housing is certainly increasing rather quickly right now given increasing prices and increasing mortgage interest rates! | |
Will Home Prices Drop As Mortgage Interest Rates Rise? |
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Question... Will Home Prices Drop As Mortgage Interest Rates Rise? Short Answer... I don't think so Long Answer... Above you'll find a graph showing the median sales price in Harrisonburg and Rockingham County over the past ten years, shown in blue, and the average mortgage interest rate during the same timeframe, shown in green. A few things to point out... [1] Yes, it is accurate to observe (see the red arrows) that while the median sales price was increasing rather quickly over the past four years, the the average mortgage interest rate was also dropping steadily. Did prices only rise because rates dropped? No, that does not seem likely at all. Did prices continue to rise as much as they did at least partially because rates were so low? Yes, that seems relatively likely. [2] Interest rates rose sharply in June 2013 and December 2016 (see the first two yellow circles) and sales prices did not start declining -- though, those increases in rates were followed by prolonged periods of declining interest rates. [3] Interest rates rose steadily (!) between mid-2017 and early 2019 (see the third yellow circle) and sales prices did not decline. [4] Interest rates started rising, and falling, and rising, and falling through pretty much all of 2021 (see the fourth yellow circle) and prices kept right on climbing. So... as we head into 2022 and as we start to see mortgage interest rates rising... will home prices decline? It seems unlikely that an increase in mortgage interest rates, alone, would cause home prices to decline. Yes, it is true that a buyer's potential mortgage payment will increase with higher interest rates, so that might reduce their buying capabilities - but plenty of home buyers, in this area, these days, seem to be buying below the top of what they could afford to buy -- so slightly higher mortgage payments may not affect them as much as we'd think. That was a lot of thoughts -- about a lot of numbers -- if you have thoughts of your own, feel free to email me as I welcome a variety of opinions and perspectives! | |
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Scott Rogers
Funkhouser Real
Estate Group
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scott@funkhousergroup.com
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