The last 2 years has been great for the housing market. Now, 30 year mortgage rates are on the rise. What does that mean for the housing market now? How does it impact buyers and sellers? What will happen going forward?
The last 2 years has been great for the housing market. Now, 30 year mortgage rates are on the rise. What does that mean for the housing market now? How does it impact buyers and sellers? What will happen going forward?
Welcome back, guys, do you live finance in between podcast? You already know how it goes. I'm Eddie Thomas, is brought to you by wealth management services in Hershey, PA. Really? If you're watching the video, I'm trying to figure out where to put my mic right now struggling. Maybe this is a good spot? I don't know, we're gonna find out anyway. Now that's out of the way, I'm all set up should not force our recording. But here we are. If you listen, the audio version, my bad, you see me rambling? But no, what I wanted to talk about today is the housing market in 2022. And how we're seeing that shakeout it's it goes without saying that, and most more specifically, mortgage rates and how they're going to impact the market going forward. But what we have seen in the past two plus years, obviously, like since COVID, and through now is just unbelievable growth in the housing market. What was somewhere between two to three to 5% growth per year in housing values, and it was pretty, that was consistent it they've rocketed these past couple years, 10 plus percent. And it's been consistent throughout those years. And there's been a couple of reasons. Reason. One is really low mortgage rates on the 30 year. Reason to is not a ton of supply, I think we've seen since 2008. to Now we haven't built as many homes as we've needed from a consumer stamp standpoint. So the homes that are available are getting bid up because there's limited supply. When you have scarcity in something like the housing market, people are going to pay significantly more than they would normally because they can, because their mortgage rates are so low, and they just want to get into a house. So this is the only house on the block, guess what they are going to pay as much as they possibly can to get it. And so because of these kinds of factors, we've seen some serious growth in the market, like I said, and if you're selling, it's unreal, if you're selling you are getting a very good price for your house. That means you do have to buy something. So I'm assuming you're either going to downsize or you're going to use that money for a down payment on the next home. Who knows everyone's situation is different. But if you're buying, it's not as favorable. The mortgage rates, yes, they are favorable. But the sticker price as to what you're buying houses is not however, the caveat to that is because the mortgage rates have been so low, we're talking sub 3% for a mortgage, you're able to make that $400,000 house 500 $600,000 house work from a monthly cash flow standpoint, because that's really what it comes down to right. When you're buying a house. And someone is deciding how much is in their budget, it really depends on that mortgage rate, because it really depends on what is my monthly cash flow will not be able to fit this mortgage into my monthly cash flow. Meaning whatever I make, is this one expense to live here going to be too much, or can I afford to do so. And because of those little low mortgage rates, we have seen people be able to take much, much more house than they've potentially have been able to in the past. And that also lends itself into the incredible increase we've seen in housing values and prices that people are paying for these houses. Now, though, now coming into 2022 when we got out of 2021 and came into this year, Zillow and pretty much any forecaster was, was forecasting, tremendous growth, again, tremendous growth, again in the housing market, somewhere between 11% to 15% of growth, and then they are going to say that sales were going to grow another 60%. And after you have two amazing years already, the growth on top of that just seems like it's not slowing down anytime soon. And people didn't think it was going to and what we have seen and it's been unexpected, but we're seeing it now is the 30 year mortgage increase at a much much quicker rate than we originally anticipated. A lot of forecasts had it at the end of the year that 30 year mortgage hitting 4.5% After being I mean you get a mortgage for 2.5 to 2.7. Not that long ago and then it has ticked up from there. So now it's people forecast 2022 to be 4.5%. However, we're sitting here in March of 2022. And it's at 4.7%. So it's already four, it's already surpassed everything we thought it would potentially hit. And that's for a couple reasons. It's because of the unforeseen factors in Ukraine, Russia invading Ukraine, it's because oil prices are so high, the Fed raising rates, so banks are raising rates, it just gonna get more expensive to borrow. And we're seeing, especially in the 30 year mortgage rate at the moment. But so what does this do? What does us hitting a 4.7% 30 year mortgage mean, for the housing market? Are we going to see the same kind of growth we've seen in the past two years? If you're selling, what does that look like? Now, if you're buying, what does that look like now? And I think what it does, and this is what interest rates due to inflationary numbers like this is gonna dampen the housing market a little bit. And why is that because when you're a buyer, and you are buying a, let's call it 300,000 $300,000, mortgage, at a 2.5% interest rate, we're looking at roughly 1185 a month. Now, if you're at roughly 4.5%, you're looking at 1520 a month. So call it roughly$400 a month more. That's over the year, that's 4800 per year,$4,800 per year, and then over the life of the loan, call it 30 years, it's another $144,000 Most people don't keep the house for 30 years, if they do you're there forever. So that doesn't matter. So what does that mean? means that when you're buying a house, instead of maxing out your budget, because you can afford 1185 call it for 1520 Lux is a whole lot more expensive than 1185 on a monthly basis. So that person selling that house for call it 300,000. Now really, either they can't afford to well, they can afford to but they can't, they don't have the market they did in selling it to to the market $300,000. So in turn, what do they have to do they have to lower their price, they have to lower their price, because that's what the market is going to demand from them. Because the buyers say, we can't afford this, we can't afford the monthly payments at a higher mortgage and mortgage rate. Because of that, we're going to need you to lower your price. And when you get that on a mass scale, and a lot of people deciding to do so and say I can't afford this I'll offer you lower, the sellers don't have as much power in that market as they would somewhere else. Just because if the demands not there for the price, you're setting it, you have to lower your price. And that's how demand works. Even if supply isn't as high as it's normally as there's other avenues out there, there's houses that are selling for less, there's rent, that's going to be less than a mortgage payment at this point, the buyers have more substitutes, and other avenues, they can take them buying your house, so you have to lower the price of your house. That's how it goes on a macro scale. So we see when mortgage rates increase as much as they are, people will not buy as much house, they will not buy as expensive of a house, the houses that were marking themselves up for 20% increase 25% increase, whatever the increase was, will no longer be able to sell at an increase is that that's that high. And now we're gonna start seeing buyers have a little bit more of a wiggle room with you're not going to have these crazy bidding wars and people paying exorbitant amount because now they can no longer finance the month a month as easily as they could before with a lower mortgage rate. So what does this do? What did the forecast say now with the mortgage rates being as high as they are? Some forecasts were dropping it down from a potential six to 8%. Once Yeah, okay, so the forecasts that had the market selling 68% now have potentially 3% less and now 60% or 3%. That's a huge swing that's 100% Plus swing if when you're looking at it, because the mortgage rates are just too high, and you're not gonna be able to sell. So when you have this kind of big swing, and I think it's not going to happen quickly. So if you're in the housing market right now, and you're looking to buy a house or you're looking to sell your house, you still have a window here and I believe you still have a window where people are still going to pay a bit more. I think we're starting to see the groundwork for the latter half of 20 to 23. 24 Now the house values, the prices are going to come down because mortgage rates, we'll see where they end up. But I don't see them going down, at least not back to where they were. So now when you have a long term thing, you're not going to have as many buyers, and you're just not going to be able to ask for as much for your house. The other thing that doesn't really help the housing market is a lot of the buyers coming into the space are part of the millennial generation, they are first time homebuyers. It's better for a first time homebuyer when your mortgage rates very low, because you're paying a very low month a month payment to live in that house. When you're a first time homebuyer, you have a limited budget, and now you're paying a 4.5 to 5% mortgage rate, you get much stricter on what your cost, what your price you're gonna pay for that houses. And that's not good for sellers. And so that's what we're going to see we're gonna see the blistering pace that the market, the real estate markets been on increasing 10 plus percent per year for the past few years, come back down to reality in two to three to 5%. I'm not saying it's gonna stall out, I'm not saying that we're in any type of Oh, eight type situation at all, what I'm saying is, it's just going to slow down, and it has to it wasn't sustainable at the price it was people were not going to be able to afford houses, especially once 30 year mortgage rates increased, it's just not going to be the case. So we're gonna see a slowdown, we're gonna see the number, the number of sales potentially decrease, you're going to see the premium that you could try to house decrease. And that's all because of the 30 year mortgaging percentage increasing as much as it has in the first three and a half months of the year. So we will see long term how this plays out. But that is my my forecast is whatever forecasts we saw in the beginning of the year from Zillow, or any other estimates, having the real estate market increasing at the same rate it had been, that's not going to happen anymore, it's going to take a pretty significant decline is still going to rise, you're still going to have the property of your housing property increase the value of it increase, you're still going to have sales of this, I just think the longer term this goes and the the higher that these 30 year mortgage rates go, it puts a damper on on that side of the market and people won't be able to sell as much, they won't be able to sell for as much the buyers won't be able to afford as much house. And ultimately, I do think it's healthy for the housing market to go through something like that. I think people having all cash buyers and paying 30 plus percent on the premium for the house just to be a part of it, it helps it actually benefits buyers at this point, and it gives them more evil, even playing field, people are gonna be able to buy houses because there won't be these insane bidding wars. It's just not going to be if you're selling, it's just not gonna be at the price that what you've seen the past couple years here. So, but that's it. I didn't I didn't expect I don't think anyone expected the 30 year to increase as rapidly as it did. But there's a lot of unforeseen circumstances coming out this year between the Ukraine and inflation being as high as it is. And who knows what's gonna happen the rest of the year, right. So that's kind of the impact that mortgage REITs have on the housing market. I think we're gonna continue to see that, like I've said, if you're in the search for a house, you could hold off to see where this kind of goes and you don't have to buy the premium. Maybe that's something you do if you're selling us something you consider as well. So I'll have another a couple more content pieces on the housing market and kind of how to think through that, but I really wanted to touch on the mortgage rate and how exactly that impacts the market. So that's what I did. So that's it for now. I'll catch you guys on the next one. Stay happy, stay healthy, and I'll see you. Securities offered through securities America Inc. Member FINRA slash SIPC. advisory services offered through securities America advisors Inc. Wealth Management Services and securities America are separate entities. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.