Mortgage rates – everyone seems to be in a panic about them, so let’s try to break this down.
Sorry, but we are jaded: For 9 years the population has been loving the under 5% mortgage rates, however that is far from what they have been historically. In fact, from 1971 until now, the median interest rate has been 7.71% ( source: Historical Mortgage Rates) … and mortgage rates have been on the uptick since 2016, almost a full percentage point from 2017-2018.
The time has come: The high mortgage rate in 2006, remember the “housing peak,” was 6.8%. After the “crash” of 2008 the average mortgage rate for that year was 6.03%, the next year: 5.04%, since we have been under 5% which historically speaking, had not happened before. These rates served a purpose, to help sales, home owners, and hopeful homeowners get in the door. Now that the economy has recovered, it’s time to take off the training wheels.
Buyer’s purchasing power has changed: The fact is, money is going to be more expensive now in terms of mortgages. Prices, at least in Santa Cruz County, have had quite healthy appreciation over the past several years, consistently on the up. However, buyer’s purchasing power has changed. Sorry folks, let’s let that sink in. What they can afford has CHANGED, and it will continue to change as rates go up ( I of course don’t have a crystal ball, but let’s just go ahead and assume that they will just for arguments sake.)
Buyers… remember: Ask yourself, what matters most – the final purchase price or the interest rate that directly effects your monthly payment? The potential lowering of purchase price does not equate in cost, necessarily, with a rise in mortgage rates. Do some math… ask yourself what an increase of potentially 1% in mortgage rate would do to your monthly payment with a 5% reduction in purchase price. Much of a difference? How about 10% reduction in purchase price or a 2% increase in mortgage rate? What means the most to you? These numbers of course are arbitrary ( again – no crystal ball over here) but it’s important when people throw ideas around about when the best time to buy is.. just do the math.
What does that mean for our market : No, the sky is not falling. The market is healthy – homes sell for what a ready, willing, and ABLE buyer will pay for it. The first two items haven’t changed, it’s the final point that is going to be adjusting. What people are able to pay is different, so there will likely be small adjustments in pricing over time. Obviously nothing drastic, interest rates are raising at a slow, yo-yo style pace. Sellers are going to need a serious talking to about what to expect. While we are no longer seeing the 20% appreciation we saw in the past, we are also not loosing drastic values, so it’s important that sellers remain educated on the reality and at the same time not panic. Buyer’s also need to realize that while interest rates are rising, that doesn’t completely change an asset’s value or the ability or willingness of the next buyer to pay what they want for a property.
Quite the tango we dance in real estate, let’s see what 2019 brings.