What is happening in our economy
There is a lot of noise out there as far as housing market predictions. We are currently in the midst of an extremely complex economic situation, with many different factors exerting influence. We have low inventory of homes, high inflation, a spike in mortgage rates, a job market that seems to keep going strong, even though experts continue to predict it to soften, oil prices fluctuating wildly, political events and talks of sanctions and more. Everything I read indicates that there are so many issues in play, all pulling the economy in different direction, it’s impossible to make accurate predictions.
The effect of higher mortgage rates
That murky, hard to dissect economic landscape baffles economists, so it’s no surprise that the average layperson selling a home can’t extract any meaningful data that can help price the house more accurately. Except one: the interest rate increase has a concrete, measurable effect.
Consider a buyer who began a home search when rates were 5% and is still looking today, in October of 2022 when current rates are 7%. As a seller, you need to understand what that difference means in the monthly payment for that buyer. A buyer whose monthly principal and interest budget is $2,167 could have afforded (an 80% loan for) a home costing $500,000 at 5% interest. In order to keep the monthly payment at $2,167 at today’s rate of 7%, the same buyer could afford an 80% loan for a home costing $407,125. Think about that. There is a significant difference in a $500,000 house and a $407,125 house. Similarly, a $1,000,000 house back when interest rates were 5% would equate today to a house priced at $806,875.
Value can’t be based on a simple formula
Please note that I am NOT suggesting that it’s a simple as that–I am not saying that a house valued at a million dollars when rates were 5% is now only worth $806,875. From a strictly mathematical standpoint, if a buyer were putting 20% down on a million dollar home, that would be $200,000. On an $806,875 house, 20% would be $161,375 So that cash “savings” of $39,825 would potentially come into play as far as adjusting the perceived difference in value (as seen through only the interest rate lens). Don’t forget, though, that the loan amount a buyer qualifies for has to do with monthly income. So even if you look ONLY at mortgage rate increases, there is still no simple way to recalibrate home values. The point is that, as a seller, if you don’t think about how affordability has changed for buyers who are relying on mortgages, you may be out of touch with the market value of your property.