Summer Interest Rate Update

Welcome to your summer interest rate update! Back in March, The Mathematician walked us through some basics on interest rates.

Then, I followed up with my opinion on how rising interest rates were exacerbating the market conditions. In that article, I explained that the rising interest rates had sent buyers into a frenzy to purchase a home and lock in rates before the rates increased further. This scenario led to bidding wars, home inspection waivers and appraisal guarantees. However, I also said that eventually the rising rates would push buyers out of the market.

And that, my friends, is exactly what is happening. Let’s talk about interest rates and market conditions. The Mathematician sat as my co-pilot today, helping me work through the information in my brain in a way that is accurate, yet digestible. (And there were some back and forth volleys for me to get everything into “normal people terms.”)

Note: All clients referenced below have given their permission for me to anonymously share a part of their story with you.

Interest Rates

According to bankrate.com, the average rate for the benchmark 30-year fixed mortgage on June 15, 2022 was 5.97%, up 42 basis points (i.e. 0.42%) over the prior seven days. The same statistac for refinances is 5.99, up 45 basis points.

The increasing rates add more interest to a monthly mortgage payment, which means a buyer would pay more per month for the same amount of home.

For example:

When most buyers decide they want to buy a house, it is not so much the overall price of the home, it is usually the monthly payment amount that is the focus. If their budget allows them to spend $1,600 per month on housing, that monthly budget can be worked backward into the price point of a new home.

Now, when the mortgage interest is eating up a larger percentage of your monthly payment, you have less money proportionately to apply toward principal. If you have less money available for principal, that translates into the need to purchase a lower-priced home. If you look at the chart above, the higher the interest rate, the less house $1,600 per month will buy.

So what is the impact of the rising rates? Read on for my assessment.

1. Buyers are choosing to stay put.

It is difficult for some buyers to justify a move when they locked interest rates around 3%. They are choosing to make it work where they are.

This week I had a client make this decision. After looking at their purchase power at the current rates, they opted to get creative. Instead of moving, they decided to take out a home equity loan to upgrade their current home. They had room to add a bathroom and make some other changes to make the home work better for them.

By taking this action, they will keep their current low rate on the mortgage and stack the higher interest rate on a the home equity loan. They can pay off the home equity loan more quickly, with less interest over time and meet a lot of their needs by staying in their current home.

And guess what? I was happy for them! (Yup, you read that correctly.) Because they found a solution that worked for their family and their finances, I am happy.

2. Buyer are choosing to sell and buy.

I had another client call this week. They have been taking steps to get their house ready for sale, knowing that they would like to move into a different school district before their son enters kindergarten.

The rising interest rates prompted them to decide to move forward. For them, it makes sense to try to sell their current home while it is still a seller’s market and buy now, as some of the competition for houses has faded a bit.

If mortgage rates drop in the future, they can always refinance to a lower rate.

3. Buyers who have no choice are still buying.

Major life events still happen, good and bad. People still leave mom and dad’s nest, get married, get divorced, have babies, send babies off to college, take a job transfer, have health problems and, of course, we all die at some point. These people will always be in the market to buy or sell, and, arguably, they are the backbone of the housing market.

As our dads sat around our kitchen island on Father’s Day, they swapped first-time homebuyer interest rates. My dad said the rate on my parent’s first house was 13%. But guess what – they still bought because there was no way in hell they were living with my grandparents after they were married. People make it work to have a place to call their own.

4. Buyers who cannot afford to buy and are stuck, for now.

The historically low interest rates empowered many buyers who otherwise would need to rent or stay with family. People who were just over the debt-to-income ratio for a mortgage will be forced to wait until they build up additional savings or bring home additional income.

The Fed Meddles

Regardless of how you feel about the Fed, the rising interest rates are having the Fed’s desired effect. The competition in the market is cooling.

For example, I had a client looking in Livonia for a 3 bedroom ranch. Three bed ranches are the bread and butter of Livonia. Even in this tight market, there is a fair amount of choice. He offered on a property in mid-May. This beautifully updated home had 15 offers on it. Two weeks later, another home had 7 offers on it. Two weeks after that he went under contract on a home where he was the only offer after six days back on the market following a buyer flaking out. His story is a fair illustration of what I am seeing as the market starts to normalize after a two-year stay in Crazy Town.

So what does this summer interest rate update mean for you?

Well, it depends, right? If you need to buy or sell, you still can. Do we all have a little sticker shock on goods and services right now? Oh, heck yes, we do. But we still need water, food and shelter.

Thanks for joining this week. As always, I’m here to help with all your homeowner questions, concerns, goals and dreams!