A home inspection includes looking closely, paperwork, and the crawlspace

REal Talk… How Interest Rates Affect Payments & Pre-approvals

by | Jan 20, 2022 | Real Estate | 0 comments

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Hi there & Happy New Year!

I love the new year!  I love that the whole year is laid out before me like an unopened present.  It’s time to lay down some general plans, & goals for the new year.  A time to look over last year about what I did well, and what I would like to change for this year.  The new year is a lot of what we ‘think’ this year will look like, and this may be a good time to talk about this.

In 2021, we saw home prices sky rocket (again).  Those folks that purchased at the beginning of the year are sure glad they did!  I have a client that closed almost a year ago for $350,000 on a 1096 sq ft 3 bedroom, 2 bath home.  That same home right now is being listed for over $400,000.  This is crazy… and yes, a bit alarming.  In 2021, we saw a home buying frenzy that was in part being driven by (still) historically low interest rates, and (again) historically low housing inventory.  It is the classic economic story of ‘supply vs demand’, and it is just as tragic as Romeo & Juliet.  You see, when something is rare, and many people want it, they will all offer on it trying to out bid one another.  This now sets a precedent for the next rare item that comes available, and so on, and so on.

Interest rates are increasing.  Economically speaking they should have started going up in 2016, after we had a $30k increase in home values that year.  However, the government isn’t exactly great about doing things with a 20/20 vision, and that is all that I will say about that.  I had a Economics college professor once tell my class that the best way to think of the economy is like a bathtub…  You want the water to be deep enough when you get in to cover your good bits, but not so full as to overflow when you get in.  It it gets too full then you need to let some water out, but be careful not to let out too much.  Before the recession, the tub got too full with predatory loans and people getting crazy adjustable rate mortgages & 80/20 loans.  So the recession happened, and water got let out. …. too much… so the government put the plug in by buying down interest rates that added to low housing prices started filling up the tub again.  The bottom of the market was 2011, with the transition years being 2010, 2011, & 2012 when prices started increasing, and we started seeing some multiple offers.  The market steadily increased at a healthy rate, until 2016, when we saw the ‘jump’. At this point, interest rates should have gone up a little to let a little water out, and the same for 2017, and forward to now.  Yes, rates would be higher, but home prices would be lower, and this would have had us in a very comfortable bath tub.  However, as we know, this did not happen, and the government continued to buy down interest rates, and now water is overflowing the tub & sloshing all over the place as interest rates are still historically low, but home prices are historically, well…. not.

Now, my friends, we have a mess to clean up, and anyone who has ever had to clean up after an overfilled bathtub (thanks kids), will tell you it isn’t as easy as it sounds, and sometimes, depending on how long it has been overflowing for, some things need repaired.

One thing to remember is that Real Estate ‘typically’ follows a 10 year cycle.  2010, 2011, & 2012, were our last transition years for the Great Recession.  I think we saw/will see that 2020, 2021, & 2022,  are our transition years this time.  As interest rates go up, the amount that buyers are pre-approved for go down.  One thing most buyers don’t realize (or are taught) is that they are not pre approved for a dollar amount.  They are pre approved for a mortgage payment amount.  As the interest rates go up, so does the mortgage payment, which means how much home they can afford to buy goes down.  I have had a few people recently tell me, “Tracie!  This is great!  That means home prices will come down!!”  Sorry Charlie… that isn’t exactly how this plays out… at least… not right away.  You see…  Bob & Julie were pre approved in December for $430,000, but at todays rate, for the exact same payment, they are pre approved at $400,000.  They just ‘lost’ $30,000 in home buying power, and are now looking at whole different type of home.  This is going to make things crazier for awhile, and yes, home prices will still be all over the place as this shakes out.  However, it is is never just one thing, and this plays into what we are already seeing with groceries … inflation.  When the water isn’t let out of the tub… it makes a mess all over the place.

What is the answer?  Unfortunately my friends, for the last few years, I have felt a bit like Cassandra in Greek mythology, as I have kept saying that interest rates need to come up for us to continue to have a healthy market for home buyers, and home sellers.  I do not have all the answers…my crystal ball has a crack in it, my wand is on the fritz, and the magic 8 ball is a freaking liar.  What I do know is that people who buy are still better off than folks who rent.  Your mortgage is your mortgage.  While the mortgage payment will change a bit every year due to taxes & insurance (I will go over that in a different post), it is still your home, and your equity.  Rents are still going up, and will not stop anytime soon as the demand for rentals is still higher than that supply.

Will it all change?  Absolutely!  What goes up has to come down, and what goes down has to come up.  We bought low with a rate of  6.875% in 2001.  The market went way up, and about the time we thought about selling… it crashed and we owed more than it was worth (hello recession!), but we stayed put, and stayed the course and sold for more in 2017.  We took our equity from our old home, and put into our current home. Our current home was a bit more than I was comfortable with in 2017, but now I am so glad we went for it because my mortgage payment is pretty close to most of my clients, but I could not have afforded to buy my home for what it is worth right now!  When the market flips, my homes value might go down, but my interest rate will still be awesome… and my payment will still be about the same as most of my clients who are buying lower with a higher interest rate.  How does that work you may ask?

When I sold my home in 2017, I owed $200,000 & I had a 5.5% interest rate.

Our buyer purchased it for $290,000 with a 3.25% interest rate.

Their mortgage payment was only $53.26 more than our payment at the time.  Even though they purchased it for more, their interest rate was lower.  It balanced out, and this is why the market has been so crazy the last few years.  The historically low interest rates have given buyers a lot of home purchasing power, but now the home prices have caught up.  2022, here we go…  I can’t tell you what happens now, but as always, “may the odds ever be in your favor”  I am here for any questions, and always available to help you with your next Home Adventure… Whether you are buying, or selling…  I got you Boo!

Have a great day, and I will talk to you soon,