Loan Officer Jim Brown with Rate Guarantee prepares for a tough couple of months ahead due to rising interest rates.
“Demand for mortgages is at its lowest level in 22 years. Refinance requests are down 75% year-on-year (basically there are none). Rates are over 6%. This is, in my view, the biggest rate hike since the Jimmy Carter years,” Brown wrote in an email to Wicked Local.
According to Brown, a $500,000 mortgage costs about $913 more a month than it did six months ago because of rising interest rates. Thirty-year fixed rates are just over 6% with zero points. Six months ago it was 2.875% with zero points, he said.
“The economy is being crushed every day. Higher oil prices, more expensive groceries, 401k and investments losing huge sums. This, coupled with falling consumer confidence, does not bode well for the future,” Brown wrote.
On June 10, the CPI was its worst in 40 years, the 10-year bond hit 3.49 for the first time in a long time and inflation was at a 40-year high, he said.
From June 10th to June 14th, there were more than six rate hikes in the mortgage market and rates rose from about 5.375% to about 6.50%. Brown said he had never seen rate hikes like this in his 39-year career as a loan officer.
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“Consumer confidence will fall and the economy will have to slow down,” Brown said.
Guaranteed Rate’s economic advisers tell loan officers the next three to six months will be painful, but they should be out within a year, according to Brown.
He hopes it doesn’t take as many years as it did after the 2008 crash.
An experienced broker’s perspective
Since 1977, Jim Savas, broker/agent with Berkshire Hathaway Home Services Commonwealth Real Estate, has represented buyers and sellers of residential real estate. He has noticed a market shift for the past two months.
“Houses will take longer to sell and there will be no appreciation, maybe some depreciation,” Savas said.
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Lately he has noticed that the number of visitors to the open house days has fallen just as sharply as the number of housing offers.
On the other hand, inventories are starting to rise, Savas said. For example, in Belmont there were 27 single-family homes on the market as of June 16, compared to less than half that amount a month ago, and he expects inventories to continue to rise.
The number of market days is also increasing. The average is now two weeks, Savas said, while houses used to be under contract in days.
The stock market is also affecting buyers in the high-end market, according to Savas. Due to the sharp drop in value, many people are unable to cash out shares against down payments, affecting transactions.
Good news for home buyers
“If inventories equalize with demand, we will see prices stabilize this year and possibly see a slight decline in prices, particularly at the higher end of the market,” Savas said.
What does this mean for real estate sellers?
“Homes in our area will continue to sell, the time to market will be longer, prices can be slightly impacted,” Savas said.
If you sell for less, you’ll buy for less, so it evens out, he said.
“What’s not being offset is that your payments are going to be a lot higher in the new interest rate environment,” Savas said.
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Based on his experience, Savas said, eventually interest rates will come down and people will be able to refinance.
No reason to panic
Colleen Barry, CEO of Gibson Sotheby’s International Realty in Boston, said the real estate market usually slows down in June. She does not yet see a major shift due to rising interest rates.
The Spring Market started earlier than usual, Barry said. There were many more homes under contract in April compared to previous years, which could indicate that people were rushing to buy before interest rates rose.
It feels like a shift, she said, especially compared to the COVID market they’ve seen over the past two years.
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“It’s a supply and demand market and we haven’t had a huge supply influx. A large demand has not yet been satisfied,” said Barry.
She is confident that the market will continue to be strong unless there is a major shift on the supply or demand side, or both.
During COVID, Barry said, more people were moving because they needed more space to work from home and to take advantage of low interest rates.
“Money was so cheap, almost free,” she said.
Will the 2008 crash happen again?
Barry doesn’t think history will repeat itself.
In the early 2000s, lending practices were dangerous.
There were a lot of people with no equity who financed 100% of their purchase and used adjustable rate mortgages.
“We no longer have these irresponsible practices,” Barry said.
She said the current crisis is not the same.
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She said there could be a market slowdown, but not necessarily a market shift.
“People need to rethink what they can afford when they have to borrow,” Barry said.
If they could afford an $800,000 house yesterday, next month, it could be anywhere in the $700,000 range.
Sellers also need to lower their expectations. The sale may take longer and they will have fewer offers.
Waiting for data
Tim Warren, CEO of the Warren Group, which has been collecting and analyzing real estate and financial data for 150 years, said it’s too early to tell based on the data available through April.
Over the past 2.5 years, The Warren Group has seen double digit increases in average selling prices across Massachusetts. At the same time, the number of houses actually sold has fallen.
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For the month of April 2022, the number of homes sold decreased by 15% compared to 2021. Comparing the first four months of 2022 to 2021, the number is down 11%.
However, data for the next few months may show a difference due to higher interest rates.
“It’s a little early to see the effect of higher interest treats on sales data,” Warren said.
He expects a change in the second half of the year, but doesn’t know how dramatic it will be.
Why is stock so low?
Warren said there are several factors that could affect inventory levels. He believes more people are aging in place. Baby boomers decide not to sell after their kids move out. They are comfortable where they are.
Others may be nervous about moving around during COVID so they stay put.
Also, people might not be sure where they would go after the sale.
Warren’s predictions
Warren believes people will see the impact of higher mortgage rates and a slowdown in the housing market in the second half of next year. Home sales will continue to decline, possibly by 20% instead of 11%.
He expects house prices to continue to rise, albeit modestly, in the second half of the year by 2% to 5% versus 10% in the first four months of 2022.