Grab your coffee and get comfortable for a little chat.

This is another one of those long winded conversations I have with my clients.  The Federal Reserve (the FED) is having to get aggressive with its fight against a recession and inflation.  Let’s face it.  The ultra low rates we have had for more than a decade haven’t helped us in the macro sense.  And don’t even get me started on the excessive money printing. (What is backing our greenback?)

Anyway, let’s stick with the real estate market to avoid making this too long.  As the FED increases the fed funds rate, the financial markets react, and with that does the 10-year treasury note, which is what mortgages based their rates on.  An increase to interest rates makes borrowing more expensive, and therefore affects the amount of money a borrower/buyer can qualify for.

Buyer issues

If buyers qualify for less of a mortgage, then that means their purchase price is less, as well.  Their monthly payment is going to be limited to what the lender believes the borrower can easily pay within their budget based on their income.   Basically, the lender doesn’t want you to foreclose in the future, so it limits your borrowing power.

Then this buyer goes out to search for a house.  Well, whereas during the previous 2 years this buyer would have qualified under a 3% interest environment for $500,000, now he or she only qualifies at the 6% mortgage interest rate at $425,000 price point.  Yet, everything he or she sees on the market is now $550,000.  What’s the option?  Wait for prices to come down.

Seller issues

But what about the sellers?  If they are sitting around at a $550,000 price point, but the majority of buyers are in the $400,000 range, will that house sell?  Do those sellers accept the new reality of the market’s buyers or do they continue to sit and wait for the smaller pool of buyers that are still in their price range?  It will depend on the seller.  Does he/she need to move?  Is the house in probate or part of an inheritance where it has to sell?  Does the property owe back taxes?  Is the seller now unemployed?

Remember that it only takes one seller in a neighborhood to agree to a lower price to adjust the market price downward in that neighborhood.

So what’s going to happen in the future of the real estate market? 

I believe that for the rest of this 2022 year, we are going to see prices drop a bit from the historic levels that exist today.  How much?  Well, that really is going to depend on the average current price in a neighborhood versus how much it went up during the previous year, the number of homes for sale in the neighborhood, etc.

Real estate is so market specific that it really does take a bit of study to make accurate market predictions.  If you want me to study your market, just reach out to me.