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Pace of Interest Rate Increases Changes Deals Quickly

Florida Realtors economist: Today’s homebuyers stress over inflation and rising mortgage rates, which are pushing buyers to lower expectations and find something quickly.

ORLANDO, Fla. – We know that the process from offer to close is one of the most stressful for even a seasoned Realtor®. A hiccup on a credit report, an unexpected issue in the inspection – it seems nearly anything can potentially scuttle a deal before everyone gets to the closing table.

Financial issues are among the top issues for homebuyers, particularly among the 87% of buyers who finance their home purchase, according to the National Association of Realtors’ 2020 Profile of Home Buyers and Sellers. Those who obtain loans finance approximately 88% of their purchase.

For buyers who managed to save a down payment in the last few years, several obstacles stand in their way. Housing inventory plummeted when many people stopped putting their homes on the market, even as demand skyrocketed from people moving out of city centers to sunbelt markets during the pandemic. As a result, out-of-state buyers continually outbid local buyers thanks to large cash-outs after selling a home in a higher cost area.

But this is old news.

The new challenge facing today’s buyer is the rapid pace of economic challenges pushing against them, namely inflation and increasing interest rates.

Their nest egg of a down payment is worth less today than it was a year ago since yesterday’s dollar only stretches to about 92 cents today (accounting for approximately 8% inflation). Inflation also hampers their ability to keep saving, as the same basket of goods today costs more than it did a year ago.

While inflation has always been at play, the current inflation rate is at a 40-year high, and wage growth hasn’t risen enough to overcome the impact of pricier goods and services. Instead of putting $500 per month in their savings account, for example, people increasingly dip into money usually set aside for savings just to cover their increased cost of living.

But more astonishing is the pace of interest rate increases on a mortgage.

The Fed increased the Federal Funds Effective Rate significantly over the past few months in an effort to address the impact of inflation. On July 27, the Fed raised the interest rates on the Federal Funds Effective Rate by another 0.75% to 2.33%, the second large increase in the same number of months. The real estate industry is particularly impacted by fluctuations in this rate, as mortgage rates typically track alongside.

While everyone foresaw interest rate increases, the speed of those increases was relatively unexpected. Buyers who started looking for a home in January 2022 with a certain budget in mind have likely changed that budget considerably in just the last six months.

Chart showing interest rate increases this year

Since the Fed increases were expected, many argue that the market already priced those increases into the 30-year fixed rate mortgage, and that interest rates on loans may be at their peak. Still others see more pain to come since the Fed indicated there will be more increases this year and possibly into 2023.

Either way, mortgage rates, while historically still in the low end, are well above the 5-year average of 3.78% and have increased over 2 percentage points just since January 2022.

Rate increases have certainly been seen before, but never at this pace. These increases are enough to completely knock a buyer out of the market if they were already on the edge of affordability to begin with.

Chart showing mortgage rate increases so far in 2022

Fortunately, market forces that could dampen the rapid pace of price growth are falling into place. With inventory also increasing lately, there is some hope among buyers that prices will begin to soften as more supply helps absorb a still-strong wave of buyer demand.

Still, prices are over 20% what they were a year ago today. That, coupled with higher interest rates, ultimately depresses the purchasing power of buyers, particularly among first-time buyers who can’t benefit from cash-out equity to fuel their down payment.

So, what’s a Realtor to do?

Understand these factors are changing more rapidly than in a typical market and have those conversations early and often with your buyer. Know how close to the margins they are, and if another rate swing comes down soon, can they absorb it or will it knock them out of the game? Get honest about their monthly expenses now before you get too far – are they able to keep fully contributing to their savings during this time of high costs, or are they starting to flatline?

Finally, have them revisit their expectations. Perhaps it’s time to consider a different zip code or property type.

Use SunStats to show them the trends in their area for the different property types they are considering.

The step to homeownership may look a little different now than it did a year ago – but there are still steps out there to take. It just may take a little more creativity to overcome obstacles and get your clients into a home.

Jennifer Warner is an economist and Director of Economic Development

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