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Answering all those burning questions you didn’t know you had about home ownership.

Rising Interest Rates Exacerbate Market Conditions

Picture of Jessica Dabkowski

Jessica Dabkowski

Helping you with all things homeownership!

I had no idea you nerds were so into math! Your response to last week’s guest post, Interest Rates with The Mathematician, was priceless.

Let me tell you, he has already drafted his next post in his head. He offered to write again this week, but I told him to get his own blog (but I’m secretly afraid he will, all my readers will migrate over there and then, I remembered, well, math).

Now that he’s had a taste of fame, it’s all over. We’ll never be rid of him. So, keep your eyes peeled for future guest posts by The Mathematician.

This week, I’m following up on interest rates and specifically considering the impact to the housing market. Even if you aren’t personally looking to buy or sell right now, you probably know someone who is somewhere in the process. Share this article with them!

The Fed Raises Interest Rates

Last week, the Fed raised the interest rate for the first time since 2018. They increased the federal funds rate by 25 basis points (which is a fancy way of saying 0.25%). As The Mathematician discussed last week, this action typically triggers an increase in mortgage rates, even though the Fed is not directly raising mortgage rates. It’s a domino effect.

How will rising interest rates impact the housing market?

This seems pretty predictable. If interest rates go up, it costs more to buy a home and buyers drop out of the market, decreasing the demand. Home prices will slow their roll on growth and take longer to sell.

Right? WRONG. (You’re still pretending its December 2019, and everyone thinks coronavirus is something that happens after consuming too much Mexican beer.)

Of course in 2022, everything we know is still out the window. In February, Douglas G. Duncan, Sr. VP and Chief Economic for Fannie Mae was quoted as saying “We know every forecast will be wrong.”

Thanks, Fannie, super helpful. I just love those government-backed entities.

I have no crystal ball for the future, but I am going to recap what I know about the current state of the world.

We Take Low Interest Rates for Granted

We have grown pretty comfy and accustomed to historically low interest rates. The Mathematician and I bought our first home in 2013 and the interest rate was 3.25%. As a gushed to my boss, Val, about how excited I was, she asked if I got a good interest rate. I told her the rate. Val leaned back in her chair and laughed, hard. She looked at me and said, “Jessica, the interest rate on my first house was 14.07%.”

My mouth fell open in shock. I could not even comprehend borrowing money with that type of interest rate. We wouldn’t have even qualified for the mortgage with that rate because our income would have boxed us out of the debt to income (Thanks student loans! I don’t miss you. At all.)

My point here is there is an entire generation and maybe a half (I see you, young gen-Xers!) who have never lived through interest rates in the double digits in our adult life. Those ahead of us remember, but it’s been a hot minute since they lived it.

People Need a Place to Live

Regardless of what is happening in the market, in the economy or in the collective psyche of America, people need a place to call home.

In 2018, Freddie Mac estimated there was a housing shortage of 2.5 million units. As of the end of 2020, that deficit had grown to an estimated 3.8 million units.

Where did all the housing go?

Part of this trend is what Fannie calls “demographic tailwinds” (had to borrow it!) because Millennials are 72 million strong and are at peak home buying age.

Another part of this trend is the Baby Boomers are aging in place. They set themselves up with first floor masters or alternative arrangements so they can stay in their homes longer. As a result, those homes aren’t available for sale to first-time or move-up buyers.

Part of the trend is just the lack of starter home new-construction, and to some extent just a lack of new construction in general. The home construction industry was absolutely decimated during the 2008 recession and boy, was it slow to recover.

Supply Chain and Inflation Compound Rising Interest Rates

Compounding this problem are the issues with the supply chain and inflation driving up the prices of materials. (Yup, had to go there; it’s important.) If the builders either (a) can’t get a component like windows or 2x4s, or (b) can get them but can’t afford to pay for them, there’s a big problem.

Real world example: I have a friend whose family’s vacation home suffered major damage recently. The home has to be rebuilt from the ground up. Luckily, the owners had ensured the home had adequate insurance to cover full replacement of the dwelling. The quote came back from the builder…(DRUM ROLL)…to rebuild this modest 2500 sq ft home in Northern Michigan, it would cost an estimated $750,000.

Granted, this is an extreme example, but it illustrates how the cost of materials and the inability to get a hold of them affects the pricing. This scenario is not conducive to induce builders to build starter homes. They would lose money.

What to Expect in the Short Term for the Metro-Detroit Market

Based on the conditions I am observing in the market, the Fed’s decision to raise interest rates has thrown gasoline on a bonfire that was already spreading to the forest.

Buyers know that rising interest rates erode their purchase power. Buyers who have been on the hunt for awhile are now very motivated to lock in the lowest rate they can secure for the next 30 years. (Remember what The Mathematician said about that locked interest rate being an effective future discount?!).

Not-so-hypothetical example: Consider a beautiful colonial in Canton, listed for right around $565,000. A similar, but smaller, home down the street sold for $540,000 a month ago. The house is in a great neighborhood, spacious size, finished basement, backs up to woods, updated kitchen, you name it, this house has it. It has also been staged to the nines, right down to the fireplace flickering cheerily away when you enter. After 48 hours on the market, the agent lets all interested parties know that the sellers don’t want to see any offers below $625,000. I know I struggle with math, but even I know that $60,000 over list price is indicative that the market conditions are abnormal.

What does the Magic 8 Ball say about rising interest rates?

I am not going to lie to you; I really don’t know. Eventually, this furor is going to abate, but what then? People still need a place to call home. The debate over the longer term impact of the rate increase rages on, and I will be keeping a close eye on it. If the market settles and prices slow their growth path but continue to trend upwards, housing will still be more expensive a year from now than it is today.

Don’t lose heart, though; people are still winning houses! If you have a great agent, she can help you put together a beautiful offer packet to entice a seller to accept your offer. And if you are thinking of selling, strike while that iron is red hot. And if you are not going anywhere soon, enjoy the comfort of all that equity you have built up in your home!

Thanks for joining me this week! I hope you enjoyed a little insight into how The Mathematician’s information relates to the real world. This pair of articles is actually a metaphor for our marriage, I suppose. As always, I am here to help with all your home ownership questions, even if you have no plans to move anytime soon. Every home needs some help sometime!

Photo by RODNAE Productions from Pexels

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