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Mortgage rates in the 5’s?! They’re not as scary as you might think

May 3, 2022
Posted in Programs
May 3, 2022 derekevansteam

The glory days of the 2-3% interest rates are seemingly over. This has caused quite a stir in the real estate industry, as these rising rates have led to some immediate negative consequences. But we’re not worried about it, and here’s why: interest rates in the 5’s are actually indicative of the market finally stabilizing. And while things might be tough for the next 6 to 12 months, we’re on track for getting back to a healthy market in the near future. We’ll explain why and how in this article.

The problem with low interest rates

Low interest rates served their purpose in helping a lot of first time homeowners break into the market with affordable monthly payments. Especially during a global pandemic, this increase in affordability changed a lot of lives for the better. However, as time went on and interest rates remained low, the consequences became dire. 

According to data from the HUD, during the time period from April 2020 to January 2022, home prices increased by 31% and active listings decreased by 61%. Not to mention, we saw record high inflation and the number of bidding wars more than doubled. While individual buyers did indeed benefit by locking in those lower rates, it was generally bad for the overall health of the market. 

The market naturally ebbs and flows due to a variety of factors, but the Covid-19 pandemic was anything but natural. This allowed for a skew in the market that was so aggressive and unexpected that it left the chaos we see in today’s market in its wake. What we have now is a combination of increasing interest rates, decreased inventory, and significantly increased home prices, which puts a major strain on the industry as a whole. Many buyers have been priced out of the market completely.

Why increasing mortgage rates are a sign that things may be looking up

As great as the times of low interest rates were, we’ve always known it was unsustainable. Something had to give, and because home values are unlikely to ever depreciate and the inventory problem isn’t going to be solved any time soon, high interest rates will be bearing the burden of market restabilizing for the near future. These higher interest rates will likely result in:

Slowing the quickly rising home value appreciation rate.

The competition driven by the low MLS inventory caused buyers to begin bidding tens of thousands over asking price for homes. This drove up the value of all other houses on the market as well, as demand far outpaced supply. Now that many buyers are backing off due to the increased interest rates, demand has cooled significantly.

Decreasing competition in the market for buyers.

Cooling demand also means less competition. Though inventory remains relatively low as of now, the number of buyers has also decreased, meaning less intense bidding wars.

Increasing inventory.

A big reason for the limited inventory of the pandemic times was that increased cost of materials led to construction slowing or stopping completely. This meant less homes were being built at a time when a lot of people were relocating due to more jobs going fully remote. These transplants added to the demand for housing that, quite frankly, wasn’t there. Now, building material costs are going back down and construction of new builds has resumed, which should hopefully take the pressure off the inventory squeeze.

More savings in other areas.

One of the big factors that contributed to the increased interest rates was the Federal Reserve raising the federal funds rate. According to Money.com, “In theory, raising the federal funds rate will slow down the economy by making it harder for both businesses and consumers to borrow money — including for houses — lowering demand and eventually leading to lower costs on a number of goods and services.”

It won’t be easy, but we’re on the right path

As we mentioned above, the increase in rates is a bummer for everyone in the industry. However, after a while, we are confident based on our experience that the market will level out. We just have to be patient, stay positive, and weather this storm knowing it’s the only way to get to sunnier skies.