Real Estate: The elephant in the room — interest rates

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By Joedy Michael
Special to the Express

It’s the biggest question in real estate: “Should I buy a home right now? As a consumer looking at housing headlines, you’ve probably heard, “the boom is over,” “homes will lose value,” “the housing market is about to crash” and “interest rates are too high.” These are topics of concern and will be questions that real estate agents will be asked for the foreseeable future.

If you zoom out though, the past 50 years of sales data suggest that the right time to buy a house is actually always now. Housing prices in California have climbed steadily since the 1960s, from median prices of $58,000 in 1960, to well over $800,000 in 2022. But to really understand today’s market, we need the context of two major pieces of home buying: interest rates and home prices.

Let’s talk about rates for now.

Mark Fleming, the Chief Economist at First American, recently said, “much of the rapid increase in rates is likely behind us, but they may drift.”

Let’s hope he’s right.

Mortgage rates have doubled this year and could be an increase in monthly payments to the tune of $900 on average. In January, rates hovered around 3.5 percent on the average 30-year fixed. At the time of writing this, rates are more than 7 percent. Across the country, people are saying, “I’m just not sure if I can afford it.”

The recent jerk in rates is a product of the current U.S. economy. It begs the question, “When rates were so low, was the money too cheap to borrow?” Interest rates over the past 20 years have been anywhere between 3 to 10 percent, averaging around plus or minus 6 percent. While I can agree that a 7 percent interest rate feels high, one could argue it’s more normal than the sub-3 percent rates many people secured through 2020 and 2021. Ask your parents what their rates were throughout the years. Mine said they had a 15 percent rate at one point.

So, how could “now” be a good time to buy while combatting higher interest rates?

We’re at an inflection point in real estate where the last couple of years brought tremendous demand and provided limited supply. This has shifted. We’re seeing slowing supply and less demand, mainly due to the rise in rates. Inventory is lasting longer.

Here in Winters, we saw home’s days on the market increase by 157 percent from this same time last year. There is less frenzy and panic, fewer multiple offers, and fewer offers over asking. There’s been a significant drop in the competition for homes. Although not advice I typically give as an agent, six months ago many buyers were making offers on homes they had never seen while removing all contingencies.

Now you have an advantage, more negotiation power. And as a buyer, we haven’t seen this leverage in some time. This is also causing lenders to adapt. We are now seeing more use of loans called 2-1 and 3-2-1 temporary buydowns, which in essence, secures you a lower than the market interest rate the first two to three years of the loan, before a higher fixed rate in the following years. This can save thousands of dollars on the initial years of the loan.

And, if you believe “rates are going to come down,” refinancing at a later date is a great option. Add in potential seller credits, seller financing, less competition, and the settling of home prices, this means the door isn’t shut if you want to own a home or transition into something else.

That’s also what great real estate agents do, provide options to meet your needs. Looking at it from this perspective will help you and your agent make powerful and confident decisions for you and your family. Be aware, if rates do drop significantly, you can bet the competition will be back.

Finally, I appreciate the perspective that Warren Buffett often shares, “Be fearful when others are greedy. Be greedy when others are fearful.” I can attest there is a lot of fear out there, but also lots of opportunity.

— Reach Realtor Joedy Michael at Joedy.michael@norcalgold.com, or 530-545-3698.

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