Competing Pressures of the Real Estate Market
Even if you haven’t been in the market for a new home, you’ve probably heard about the housing market’s trials and tribulations over the last few years. In 2020, prices skyrocketed and mortgage rates dropped. Then inflation rose. Now home buyers are faced with a frustrating situation: Mortgage rates are on the rise, yet home prices remain higher than they were in the years leading up to the pandemic.
On the surface, this may not make a lot of sense. But there are opposing forces creating a “tug of war” within the real estate market. Here’s a look at how we got here and what’s happening in the market today to sustain high home prices.
Pandemic-Fueled Shopping Spree
When COVID-19 hit in early 2020, our country experienced a seismic shift in how we live and spend our money. People were staying home, leaving major metropolitan areas in droves, and spending less on services and more on physical goods.
Remote work allowed employees to leave high-rent areas and explore suburban communities with more affordable housing.
While the housing market experienced an initial pause in March, it rebounded with exuberance by the summer of 2020. Mortgage rates stayed, on average, below 3% for 30-year and 15-year fixed mortgages, hitting as low as 2.10% in August 2020.[1]
With rates at the lowest in a decade and people looking to snag their first homes or upgrade their dwellings, the demand grew to historic levels.
Rising Interest Rates
A number of factors caused inflation to skyrocket in 2022, including:
The Russia-Ukraine war causing geopolitical unrest
Rising energy prices
Supply shortages
Economic stimulation during early COVID-19
By May 2022, inflation hit a 40-year historic high of 9.1%. As a result, people were experiencing the headache of higher prices in nearly every aspect of their lives. Year over year, energy costs were up 34.6%, food at the grocery store was around 10.6% more expensive, and restaurant bills climbed 6%.[2]
The Federal Reserve’s primary tool for fighting high inflation was to raise federal interest rates. By raising rates, consumers spend less, demand falls, and supply chains ease up. Ultimately, this strategy should lead to inflation cooling down.
With no indication of stopping, the Federal Reserve raised rates seven times in 2022, and said it plans to continue raising rates throughout 2023.[3]
It appears that increased rates have helped ease high inflation, but these hikes have also led to higher mortgage rates for expectant home buyers.
While buyers enjoyed fixed-rate mortgages around 3% in December 2021, those rates rose to well over 6% by December 2022—just one year later.[1] As the Federal Reserve continues to hike rates to curb inflation, it’s possible mortgage rates will remain elevated throughout 2023.
Higher Rates Mean Less Buying Power
Such a significant increase in mortgage rates leaves many expectant home buyers with less buying power than they had just one year ago.
For example, let’s assume a couple has a budget of $2,000 for their monthly mortgage payment (excluding taxes and fees). Looking at the average December 2021 30-year fixed rate of 3.10%, they could afford a loan of around $470,000.
If we fast-forward to one year later, the 30-year fixed rate in December 2022 is about 6.33%. That means that with the same budget of $2,000 a month, the couple could afford a $323,000 loan. That’s a difference of $147,000—thanks to an interest rate that has more than doubled.
Low Inventory
Even though mortgage rates are on the rise and consumer demand has lessened, home prices remain high.
If we look at home prices in Q3 of 2019, not long before the pandemic, the average home in America cost $382,700. But in Q3 of 2022, the average sale price of a home was up to $542,900.[4]
At first glance, it doesn’t seem to add up. Demand should be lower because mortgage rates are higher. That means home prices should be dropping. But here’s why that doesn’t appear to be the case: Home inventory remains low.
People don’t want to sell their homes right now, especially if they snagged a historically low interest rate in 2020 or 2021. If they don’t have to sell their home, they’re not doing it. This is creating a low housing inventory, meaning demand outweighs supply, and prices remain elevated as a result.
Looking to Buy a Home in 2023?
Just like investing, trying to “time the market” is typically not recommended for eager home buyers. Instead, carefully consider your goals and financial preparedness for home buying. If you’re discouraged by rising rates, you might benefit from saving for a bigger down payment. Or if you’re a parent or grandparent, you may be considering how you might help.
Homebuying is a big decision and financial event, and you may want to work with a financial advisor to determine if now’s the right time to purchase. Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
Sources:
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.