Rates hit 7.5% - Home prices go down or rates come down
If you've watched any media, you have an idea of what interest rates have done over the last year or two.
We've gone from historic lows of 2.5% and now we hit 7.5%.
So the question is...
What happens first? Do prices drop OR interest rates come down?
Here are two examples that affect affordability.
For reference, here is how rates affect buyer affordability.
Example One:
$1m home sale with 5% down payment at a 7.5% rate. Principle & Interest = $6,650
If you change the rate to 5%... Principle & Interest = $5,100
Huge difference.
Here is how home prices affect affordability
Example Two:
$1m home sale with 5% down payment at a 7.5% rate. Principle & Interest = $6,650
To get this down to the same $5,100, this home would have to drop to $770k
What leads to drops in price?
Inventory (or the lack of it) has been the major driver of steady prices in the market. Toward the end of the year, inventory usually starts decreasing because of the time of year. We haven't seen that happen yet, but that doesn't mean it isn't coming.
For prices to come down in a meaningful way, we would need to see a ton of homes go up for sale.
What could cause a huge increase in listed homes? A ton of people are saying that homeowners are not able to make their mortgage payments and will be forced to sell their homes. If that were the case, we would see a spike in people late on their mortgage. This number is actually going down.
On top of that, Investopedia, says that 42% of mortgaged properties are "Equity Rich". Meaning that they have 50% or more equity. Even if these people were behind on their mortgage, they would be selling and cashing out.
There would definitely be some people who bought at the peak and haven't built much or any equity, but it wouldn't be the majority.
The only thing that clearly points to home values coming down is buyer affordability. Orange County's median home value is $1.062m which means that the average qualifying income is over $200k.
What about interest rates?
The biggest lever for affordability is interest rates. So what is the likelihood that they come down before home values do?
Nobody knows for sure, but it seems that by the end of 2024, we'll see interest rates back down in the range we've been used to. Not historic lows in the 2% range, but a healthy, 4-6% range.
Interest rates coming down is less of an if and more of a when.
Summary
With that being said, in a perfect world, you buy at the bottom and refinance when rates come down.
The question then is, do you feel like the bottom was last winter, or are prices dropping before rates do?
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