5.5% Interest and What it Means
Before starting my day each morning I open my Mortgage News Daily app and check the current interest rate for thirty-year fixed loans. Changes in inflation and the volatility of nearly all markets in the last sixteen months forced the Federal Reserve to introduce robust policy changes, which recently impacted homebuyers more intensely. These interest changes have been almost as volatile as the global markets themselves, oscillating between 5.2 percent at the end of May, to 6.28 percent the fourteenth of June, and now sitting comfortably at 5.5 percent as of this morning. Many homebuyers expected, somewhat correctly, the increased rates to curve the real estate climate from the competitive (and mostly toxic) seller’s market of the last two years to a more accessible buyer’s market, where bidding wars and appraisal gaps would no longer be the norm. And although this has been the case to some extent, we’re still seeing the most attractive listings receive upwards of five offers and sellers still unwilling to budge in any of their strict, irrational demands. So what have the rate changes truly achieved, and will there be a plummet of home prices in the future?
“We’re going to wait a few months before looking again,” one of my clients said to me recently. “Homes are still too expensive and we think they’ll drop to normal levels again.” In my years as a real estate agent I've learned to pick my battles. My number one job is to protect my client’s interests, whether they're buyers or sellers, and get them the best deal while traversing the often thorny path towards closing. So when a client makes a decision more akin to a personal life choice, I step back and allow them that right. (Many agents will roll their eyes at this, proclaiming we are salesmen and must sell at all costs.) But I'm tempted to ask, what are normal levels? If the annual inflation rate in the United States in 2021 was seven percent, why would you think this will get reversed out of thin air? Inflation devalues money, and it’s reflected in higher prices everywhere. We must also account for out-of-state buyers, mainly from New York and California, who think the current home prices in Florida, while high for locals, are a steal in comparison. They're buying cash and over-purchase price, waiving inspections and appraisals, setting new home values for entire neighborhoods while doing so.
Although the Federal Reserve’s policy changes caused a slight leveling of home prices, we’ve observed a sharper decline in the number of overall qualified buyers. Those who qualified for a 500 thousand dollar home three months ago suddenly have to be more mindful about their budget. Several agents have seen their deals go sour as their clients couldn't get a reasonable rate locked in — reminding buyers that a pre-approval is only a snapshot in time of their financing potential, always at the mercy of any national and global trends. And while some continue to wait for a better time to buy, companies like Disney are taking advantage of new developments and setting up regional hubs that will change the average income per capita of the area by relocating workers from California. “I saw two-bedroom apartments they’e planning to rent for thirty-five hundred dollars,” said one my coworkers about a neighborhood in Lake Nona. “To us it’s crazy but to people from that state it’s normal, or even cheap.” If the average wage for these Disney employees is 120 thousand dollars annually, according to the Orlando Economic Partnership, they can easily buy any home in Lake Nona and Orlando — why would home prices drop?
There’s one way I see home values declining a considerate amount — a way that supersedes inflation, appraisals and the solidified market value of sold homes, and the price influence from out of state money: global economic collapse. Consumer-spending data is fueling worries about a recession. Gas continues to break record highs. Russia is unrelenting in its attack on Ukraine. China waits. If something happens at a global scale all markets will take a hit, but, for now, expecting that 400 thousand dollar home to go back to 280 is a dream better left in the past.