Just what the heck is going on with the real estate market with interest rates now up to around 7%? In general, the rise in rates from below 4% to around 7% has taken some people completely out of the market and knocked others down significantly in price point. But still others are just now getting into the market based on needs or other factors. Add it together and there are simply fewer buyers out there than there was 18 to 24 months ago.
On the seller side, as the WSJ wrote on May 10th, around 70% of people in this country who have a mortgage now are paying 4% interest or less. So if you bought your house 2+ years ago and have a super-low rate, you would have to downgrade your house if you wanted to sell and buy a new home. Because of that, sellers who don’t have to move, aren’t moving. The vast majority of sellers now are estates, long-term homeowners who are downsizing/moving to facilities, people moving to warmer and-or lower tax states or job changes. There just aren’t the discretionary movers who have traded up in houses with the rising prices and low rates.
So despite having fewer sellers there is an even larger drop-off in sellers; creating limited supply and therefore no drop in prices locally; despite the higher interest rates.
Here is a chart of Interest Rates by Month. What this shows is that rates started rising in January of 2021, dipped again in early 2022 and have been above 4% since April of 2022. They crossed 6% in November of 2022.
| 2021| 2022| 2023
Jan | 3.25% | 3.50% | 6.48%
Feb | 3.375% | 3.75% | 6.32%
Mar | 3.50% | 3.99% | 6.42%
Apr | 3.625% | 4.25% | 6.27%
May | 3.75% | 4.50% | 6.79%
Jun | 3.875% | 4.75% |
Jul | 4.00% | 5.00% |
Aug | 4.125%. | 5.25% |
Sep | 4.25% | 5.50% |
Oct | 4.375%. | 5.75% |
Nov | 4.50% | 6.00% |
Dec | 4.625%. | 6.25% |
Source: Bard, Google AI
While this would seem like a huge blow to real estate sales, a little perspective is in order. 6.79% is not high historically. The average monthly mortgage interest rate over the last 30 years is actually over 7%; we are close to that now. Here is a chart from Wells Fargo late last year. We are still below the 30 year average, but at the highest rates since the early 2000’s.
Similar to times of high interest rates in the past, more Adjustable Rate Mortgages (ARMS) were issued in 2022 with the assumption that interest rates will get better at some time in the next 7 years or so. They peaked at 15.7% in early 2022 but have dropped below 12% earlier this year as those adjustable rates ticked up more than fixed rates and they are now actually higher than a 30 year fixed. That likely will change at some point.
In terms of actual sales for Q1 2023, the numbers of listings dropped 31%, sales dropped 25% but prices were actually up 6% in Forest Hills. That is a clear indication that we shouldn’t expect any significant price decrease unless there is some event that dramatically reduces demand.
If you are thinking about selling, you don’t need to worry about falling prices and homes with good value and/or renovations will stand out with the limited number of listings.
If you are thinking about buying, inventory is low and don’t expect any fire sales; shop around for the best interest rates. Portfolio loans (not sold to Fannie Mae for Freddie Mac) will have lower rates. At their June meeting, the FED chose not to raise the interest rate they charge any further due to the May inflation numbers (+4%, the lowest In 2 years); so the worst may be over.