Why 6-7% interest rates won’t crash our market

If you’re like me, all you are reading in the news is how the skyrocketing interest rates are affecting the real estate market. Headlines say stuff like how the rate has nearly doubled, how sales have decreased, some even are saying the market is going to crash.

Wrong. Wrong. Wrong.

Youtubers and journalists need something exciting to get your attention. If you saw a headline or video that pretty much said everything is going to be okay, would you be interested?

I think part of this drama is also that you have people whose data is correct but how they use it is wrong, or their data doesn’t give much of a historic comparison.

Affordability seems to be the main topic today. These people are talking about how much more a mortgage payment would be today compared to the all time low we saw last year……DUH! Short term thinking I say.

Here is why I don’t think a 6 or even 7% interest rate is going to do much more than curb unsustainable appreciation and slow down people moving just because they feel like moving. To begin with, people will always have changing needs for housing. Families will grow, there will be divorces, marriages, job transfers, job losses and all the other lifestlye/life cycle changes.

But here are the main reasons I am not worried: The Debt-to-Income ratio and longer term history.

Let me take you back to the early 2000s. The real estate market was crazy. Houses were selling fast in multiple offers. Prices were going up like crazy. Know what the interest rate was back then? Barely under 6%. And back in the late 90s when the market was also booming, it was about 7.5%.

A house in the Bluegrass that was worth about $250k back in 2004ish would be worth about $425k today. The principal and interest portion of your loan at 6% on a conventional loan with 5% down would have been $1423 back then and $2420 today. Yeah, that sounds like a lot more. It is, but let’s keep going here.

So the real difference between then and now with property taxes and insurance included would be about $1200 a month. To qualify for the mortgage on that $250k house back then would require an annual income of about $73k. Today that house would be worth about $425k and would need about $126k in income. The median household income has gone up 80% over that time according to the census. The value of that same house has not gone up quite as much.

So there you have it. I think if the market has historically been very good in the past during times when rates were higher than they are today, and since household income has pretty much grown congruent to home values in the Bluegrass, we will weather this period very well.

Then why is the market so slow right now? Simple. People are in shock and upset that rates went up so fast. Once they realize they can’t go back in time, they will move forward with their plans. I predict that (short of a major economic crisis that pulls down EVERYTHING) buyers will be out in force next spring. Prices will remain stable. It will be a good market. It won’t be a market that you’ll read headlines about because remember, you only see real estate in the headlines when things are exceptionally good or exceptionally bad.

How the market is changing

This is hard to believe, but I am busier with buyers than I have been all year. Buyers are out there shopping. Many listings I have shown have another showing taking place as I arrive or one coming in as soon as I am locking the door on my way out. There is a lot of activity. I think buyers are excited to have choices now. They seem excited to get to see so many houses. I showed 6 houses yesterday to one buyer. Six months ago I would shown a buyer one house. If they didn’t buy it, we would wait patiently until the next one came on the market.

Buyers seem to be pushing back a little on price. Only a few I have shown have gotten multiple offers. Also, out of maybe 14 or so houses I have shown in the past 3 days to 3 different buyers, only two of them have sold before I could show them to my clients. Six months ago, that number would have been much higher.

It’s going to be a weird rest of the year I think. It has changed so fast. We will have sellers who aren’t living in reality and think they get to call the shots. There will be realtors who also are stuck in the old market and not realize they need to hone their negotiating skills. There will be buyer’s who think it’s a Black Friday sale and want to offer 80% of the list price. This is when having a good realtor who knows what is going on in real time really helps!

What’s the rest of 2022 going to be like?

Not fun, that’s for sure.

After working in bad, good and in between markets over the past 17 years, we are entering a period where buyers and sellers are not going to be happy. Buyers won’t like that they missed out on the super low interest rates. Sellers won’t like that they missed out on the absolute hottest real estate market in all of history.

Here are some predictions:

  1. Pricing a house will become difficult. Typically you look back over the past 6 months of sales of similar houses to determine value. Well, we can’t really justify using comparable sales from when the market was so hot that about any house went for way over the list price and had 5-15 offers.
  2. Price reductions. Let me tell you something. A price reduction does not mean the market is bad. It just means the price wasn’t right from the get go. Sellers will be in denial and will want to keep pricing their houses as if buyer’s can still get a 3% interest rate. Trust me, having been in this business during the absolute work market ever, I can attest to the fact that when priced right, any house will sell quickly in any market.
  3. Home inspectors will have to start waking up and working again after practically being unemployed for the past two years.
  4. Realtors will have a whole lot more free time since the number of sales are slowing. This does not mean the market is bad. What determines a good or bad market is not the number of transactions but the balance between sellers in the market and buyers in the market. Just about everybody other than clickbait Youtubers agree that the market is cooling into a slight seller’s market. If there are 2 sellers out there and 2 buyers out there, that is a good, balanced market. Realtors are the only people that care about the number of transactions out there. Why? Because we get paid for transactions.

Want to know what I expect for 2023?

Assuming rates don’t go crazy and the general economy doesn’t collapse, I think when buyer’s emerge next spring they will have acclimated to inflation, acclimated to paying around 6% interest and they will resume buying houses.

Things to remember in a slowing market

Yea, the market is slowing down. Everybody knows that. No big deal. That crazy roller coaster market couldn’t last forever and I’m sort of glad really. It will still be a good market for years to come, but it will seem like a let down compared to the last couple of years.

Here are some things to remember as you process the Doom and Gloom news cycle real estate is in at the moment.

  1. The “Average Days on Market” will be going up. Don’t be alarmed. Usually the way that works is that the worst houses that nobody wants stay on the market longer and bring down that average. Also, keep in mind that average is usually for all residential property types in all price ranges. If you have a $350k house, do you really care about what the market is like for a million dollar home? Or a townhouse at any price?
  2. The “Average Sale Price” is another one that can confuse people. An average is just that-it’s an average of all sales. If house sales over $500k slow down a lot, it will drag down the average sale price. This does NOT mean your house is worth less when you read silly headlines that say stuff like “The average sale price dropped by 2% last month.” When rates got super low, I saw more houses selling for $1,000,000 or more than I have ever seen. Now that rates are much higher, I totally expect to see sales at that price point slow way down, bringing down the average sale price.
  3. Values may stay flat after going crazy for the past two years, but prices will still go up. I know this sounds crazy, but hear me out. Let’s say you bought a house a year ago for $400k and we have had 8% inflation since then. Your house needs to sell for $432k today for you to have effectively broken even. That’s because it takes 432,000 of today’s deflated dollars to equal 400,000 of dollars a year ago. In other words, the price of your house has to be higher even if it got zero percent appreciation just because the value of the dollar has eroded. (This is a whole other post, but one reason prices have risen so much over the past year is because we saw massive appreciation and massive inflation. If prices went up 15% and inflation was 8% of that, then that means the real appreciation was 7%.)

I started my career just as the Great Recession began. I saw most houses in our area drop in value by 15-20%. I know to a lot of people, this market seems scary. Trust me, it isn’t. All that’s going to happen is that we have a more balanced market. It will be a good, but not the greatest time in history, to be a seller. It will also be good to be a buyer because you will be able to get a house that should be a stable investment for your future.

What to expect from me for the next 17 years

It feels so strange to think about how real estate has changed over the course of my 17 year career.

Back when I was a newbie, agents hung around the office. We had like 14 phone numbers on our cards and one of them was a fax number. We dressed up….well, others did. I wore shorts year round back then. We licked the back of stamps and mailed people silly stuff like calendars. I did it once but thought it was pointless. All I’ve ever done is Christmas cards.

Then the PDF came along and changed it all. It was so much easier than a fax. There was nothing and I mean NOTHING worse than getting a fax from somebody that was illegible after several rounds of counter offers. Then electronic signature programs made it even better.

The biggest change has been to everything being online and consumer driven. When I got into this, many old school realtors back then didn’t realize that being online meant they were dealing with the public. The MLS had mostly been just for realtors. Before computers, they had books that came out once a week with listings. Since space was limited, you got stuff like “Cute 3/2 on unfin, dining room chandelier does not convey. Lockbox on backdoor.” A lot of realtors were putting that in the marketing remarks still. Also, there was one tiny black and white picture of the outside.

While so much has changed, some things remain the same. At the core, this business is really about people more than about sales or houses. It’s about helping and advising people on something that most people think they know a lot about but don’t really. I often describe my job as “Talking people into good decisions and talking them out of bad ones.”

I’ve probably got at least another 17 years left of my career. The trendy things (like the short lived QR codes) will come and go since the next generation always wants to reinvent the wheel, but I am sure that the core of this business will remain the same. I will be talking people into making good decisions and talking them out of bad ones and I will still be wearing shorts (at least on warm days).