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

Falling Knives & Crash Phobias

Picture of Jessica Dabkowski

Jessica Dabkowski

Helping you with all things homeownership!

I don’t even think I can come close to wow-ing you this week, after your feedback from last week’s article, A House in Sunny Italy. When I sat down to compose an article this week, I was feeling singularly uninspired. How could I possibly outdo my Pulitzer-deserving interview of Paul Barraco last week? Let’s be real, I can’t.

So I went back to my imaginary drawing board and considered how I could bring you some value this lovely November day. What came to my mind is bringing you some clarity around what’s happening in the market versus what’s happening in the media. I don’t have a crystal ball, but it’s pretty rare that I don’t have an opinion.

I really have to thank realtor.com for inspiring me with their article titled, “‘No One Wants to Catch a Falling Knife’: What to Expect in the Housing Market for the Rest of 2022.

Obviously, Gomez doesn’t care.

I know that the media needs a hook to draw you into the click bait, but this image seemed a little bit extreme. It conjures to mind a bloody hand which gives me the shivers, which I’m sure serves its purpose. Despite it’s wild title, this article was full of important information, and it helped me kick start some of my own thoughts and opinions on the state of our housing market.

Rates give buyers the squeeze.

You probably didn’t need a SPOILER ALERT on this one. In January, mortgage interest rates hovered just under 3% for a 30-year fixed loan. In November, rates are hovering around 7%, give or take.

Here’s some (gentle) math to illustrate. In this illustration, I’m using a mortgage loan amount of $250,000. At 3% interest, the monthly payment for principal + intereste would be around $1,054 per month. The same loan at 7% interest has a principal + interest now costs $1,663. In this scenario, it costs the buyer $609 more PER MONTH to own their home, a 57% increase.

Enjoy this infographic that I came up with – ON MY OWN, BY MYSELF, out of my brain. (I’m a little proud of myself. The younger set is probably laughing at me right now.)

I present my first infographic.

Most buyers cannot afford an increase of this size, even if they could stomach it.

So what now?

Now, we’re back into supply and demand! Back in the heyday of pandemic home buying, there was plenty of demand from buyers. Money was cheap! Remote work was great! Pandemic schmandemic! The pain was in the supply – there wasn’t enough inventory. We need MORE houses to feed this insatiable demand!

Now that the rates have pushed up the monthly cost to own a home, buyers are dropping out of the market. Buyers dropping out of the market = less demand.

Magic Mixie, A Supply and Demand Illustration

Let’s say you are an Ebay seller, and the hot item this Christmas is this crazy toy called Magic Mixie. (I can’t make this up – my daughter wants something called a Magic Mixie.)

Anyways, you’re a clever person so you manage to source a truckload of these Magic Mixies. (And this isn’t The Sopranos, so we’ll assume you paid for them and they didn’t fall off the back.)

Sorry, Tony.

You’re raking in the dough, selling Magic Mixies all through November and December. You’re selling so many Mixies, you order 1,000 more on December 15. Uh, oh. After Christmas, the kids and parents are all Magic Mixied out and you still have Mixies to sell!

You’ve lost your demand. You have two options: (1) Hire an influencer to convince parents everywhere that every kid needs a wall-to-wall case of Mixies thereby increasing your demand, or (2) drop your prices in an attempt to offload those little blighters.

Fallout of Lower Demand

Back to housing – same deal. If you’re trying to sell a house and there are no buyers who want to buy and CAN buy it, usually you are looking at a price drop or coughing up some cash towards buyer closing costs. As a result, we’re seeing home prices start to decline in many areas.

As home prices decline, mortgages become more affordable (or should I say less unaffordable? 😒). If a house costs less money, you’ll probably need to take out a smaller mortgage, which costs you less money. See my OTHER infographic (*pats self on back*) below for an illustration of this concept.

If the price is lower and you take a lower loan amount, the payment will also be lower.

The concept here is that even though the mortgage interest rate was lower in January, the house itself cost more in the hot market. During 2020-2022, prices were climbing at a wholly unsustainable rate because the low interest rates afforded so many buyers the opportunity to own a home.

How low can this limbo stick go?

This question is the big one. Realtor.com cites a statistic that home prices rose 40.6% in just over two years, starting with March 2020. I’m no economist, and I’m certainly not The Mathematician, but it seems to me there’s room for some downward correction. Realtor.com points that a 10-20% drop over the next two years isn’t as significant as it might appear at first blush.

Would you believe there are no good limbo GIFs?!

But Dabs, what about the crash?

Look, I get that many of us have some collective trauma around the 2008 housing crash and the resulting recession – even if we weren’t home buyers at the time. Despite what you may read on Reddit, I don’t think there’s a crash coming, and here’s why:

1. Subprime Mortgages Buh-Bye

Those risky subprime mortgages at the heart of the 2008 bubble were eliminated in the years that followed the housing crash. The changes in the laws basically force buyers to have some skin in the game and to ensure they are properly vetted for creditworthiness prior to the mortgage being issued. Owners who have skin in the game are at much lower risk for ending up underwater on their mortgage.

2. Shortage of Homes

There still aren’t enough homes. Even if the demand has dropped, it’s not like there’s a ton of extra housing supply floating around. Remember, at the height of the crazy, sellers might have received 15-20 offers on their home (and sometimes, a buyer beats out 14 other offers to crush their competition and take home the prize!😉).

The point is, there was room for less buyers in the market! It only takes one buyer to buy a house. The other bidders are superfluous beyond driving up the price.

3. Rates Can Always Be Cut

In this instance, what goes up can come back down. Our economy is entwined with the housing market. If we start to slide into a recession, the Fed’s favorite trick is to slash the rate at which banks can lend each other money, which then loosely correlates to lower mortgage interest rates.

I don’t know if the Fed collectively feels like this when they slash rates, but this is how it goes down in my head.

In 2008, the Fed’s slashing of the interest rates couldn’t generate the traction needed to slow the snow’s roll. There were too many houses available and the economy was in the toilet. Even though mortgage rates were low, lots of people either couldn’t afford to buy or had a foreclosure on their records which precluded them from borrowing.

Foreclosures have been nowhere near those levels, and the job market currently remains relatively strong. The economic climate is very different than what we saw leading up to the 2008 crash. As a result, the main stream experts are expecting a correction, not a crash.

Thanks for joining me this week. As always, I’m here to help with all your home ownership dreams, goals, questions and concerns. I’ll catch up with you after Turkey Day!

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