Loan officer Jim Brown with Guaranteed Rate is bracing himself for what will be a tough few months ahead due to rising interest rates.
“Mortgage demand is the lowest its been in 22 years. Refinance applications are down 75% from last year (basically there are none). Rates are over 6%. This is the largest rate increase I believe since the Jimmy Carter years,” wrote Brown in an email to Wicked Local.
A $500,000 mortgage now costs about $913 more monthly than it did six months ago due to rising interest rates, according to Brown. Thirty-year fixed rates are a little more than 6% with zero points. Six months ago, they were 2.875% with zero points, he said.
“The economy is getting crushed daily. Higher oil prices, food more expensive, 401K and investments losing huge amounts. This, along with the falling consumer confidence is not a good sign for the future,” wrote Brown.
On June 10, the Consumer Price Index was the worst it has been in 40 years, the 10-year bond hit 3.49 for the first time in a long time and inflation was at a 40-year high, he said.
From June 10 to 14, there were more than six rate increases in the mortgage market and rates went from about 5.375% to about 6.50%. Brown said in his 39-year career as a loan officer he has never seen rate increases like those.
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“Consumer confidence will fall and the economy will have to slow down,” said Brown.
Guaranteed Rate’s economic advisers are telling loan officers the next three to six months are going to be painful, but they should come out of it within a year, according to Brown.
He hopes it doesn’t last for years as it did following the 2008 crash.
Perspective of a seasoned realtor
Since 1977, Jim Savas, broker/realtor with Berkshire Hathaway Home Services Commonwealth Real Estate, has been representing buyers and sellers of residential properties. He’s been noticing a shift in the market for the past two months.
“Houses will take longer to sell and there will be no appreciation, maybe some depreciation,” said Savas.
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Lately he has noticed the number of attendees at open houses decreasing considerably as well as the number of offers for homes.
Inventory, on the other hand, is starting to increase, said Savas. For instance, in Belmont, as of June 16, there were 27 single family homes on the market, compared to less than half that amount one month ago and he expects inventory to continue to rise.
The number of days on market is also increasing. The average is now two weeks, said Savas, whereas before, homes would be under agreement within days.
The stock market is also affecting buyers in the high-end market, according to Savas. Due to the serious decline in values, he said many people are unable to cash out stocks for down payments which affects transactions.
Good news for home buyers
“If inventory does start to level out with demand, we will see prices stabilize this year and possibly have a modest decrease in prices, especially in the high end of the market,” said Savas.
What this means for real estate sellers
“Homes in our area will continue to sell, marketing time will be longer, prices may be slightly affected,” said Savas.
If you sell for less, you will also buy for less, so it evens out, he said.
“What does not even out is that your payments will be a lot higher in the new interest rate environment,” said Savas.
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Based on his experience, Savas said eventually, interest rates will go down and people will be able to refinance.
No need to panic
Colleen Barry, CEO of Gibson Sotheby’s International Realty in Boston, said the real estate market typically slows down in June. She does not see a major shift yet due to rising interest rates.
Spring market started earlier than usual, said Barry. There were a lot more homes under agreement in April compared to past years, which could indicate people were rushing to buy before interest rates went up.
It feels like a shift, she said, especially compared to the COVID market they saw over the past two years.
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“It’s a supply and demand market and we have not had a major influx of supply. A lot of demand has not yet been satisfied,” said Barry.
She is confident the market will continue to be strong unless there is a giant change to on the supply or demand side or both.
During COVID, Barry said more people were moving because they needed more space to work from home and they wanted to take advantage of the low interest rates.
“Money was so cheap, almost free,” she said.
Are we going to have a repeat of the crash in 2008?
Barry does not believe history will repeat itself.
Back in the early 2000s, lending practices were dangerous.
There was a lot of people with zero equity who were financing 100% of their purchase and using adjustable rate mortgages.
“We don’t have those irresponsible practice any more,” said Barry.
She said the current crisis is not the same.
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She said there may be a market slow down, but not necessarily a market shift.
“People will have to re-think what they can afford if they need to borrow,” said Barry.
If they could afford an $800,000 house yesterday, next month, it may be somewhere in the $700,000 range.
Sellers will also have to lower their expectations. It may take more time to sell and they will have fewer offers.
Awaiting data
Tim Warren, CEO of The Warren Group, which has been collecting and analyzing real estate and financial data for 150 years, said it’s still too early to tell based on the data they have through April.
For the last 2.5 years, The Warren Group has seen double digit increases in median sales prices across Massachusetts. At the same time, the number of homes actually selling has decreased.
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For the month of April 2022 compared to 2021, the number of houses sold went down 15%. When comparing the first four months of 2022 to 2021, the number is down 11%.
However, data over the next few months may show a difference based on the higher interest rates.
“It’s a little early to see the effect of higher inters treats on sales data,” said Warren.
He does expect to see a change the second half of the year but does not know how dramatic it will be.
Why is inventory so low
Warren said there are several factors that could be affecting inventory. He thinks more people are aging in place. Baby boomers are deciding not to sell after their children move out. They are comfortable staying where they are.
Others may be nervous to move during COVID so they are staying put.
Also, people may not be sure where they would go once they sell.
Warren’s predictions
The second half of next year, Warren believes people will see the effects of higher mortgagee rates and a cooling off of the real estate market. The number of homes selling will continue to decline, possibly by 20% instead of 11%.
He thinks real estate prices will continue to rise, but modestly in the second half of the year, increasing 2 to 5% as compared to 10% as ween in first four months of 2022.