At the top of the long list of considerations for most home buyers who are determining whether or not they can afford to purchase a home are mortgage interest rates and purchase prices. These two factors are so interrelated, that given last year’s market, purchasers are left trying to predict what 2023’s real estate market will look like in these uncertain times.
When inflation took hold in 2022, the Federal Reserve Bank raised interest rates 7 times. At the start of 2023, the average 30-year, fixed-rate mortgage jumped to just under 7%, which was double what it was one year prior. Although this isn’t even close to historically high 18%+ interest rates that some borrowers in 1981 were paying, it is still a very disconcerting raise in rates that purchasers have not experienced in decades. On a typical $500,000 30- year mortgage this results in a monthly increase in payment from $2,245 to over $3,300, an increase of $1100 per month.
As interest rates rise, purchase prices usually begin to lower. When a purchaser’s monthly payment on a loan increases due to higher interest rates, the cost of paying for the home for the purchaser becomes higher. The increased cost typically drops the general demand for homes on the market as prospective purchasers are faced with the stark reality that they will get less on this investment for their hard-earned dollar. A seller may then need to drop the purchase price to make the sale. Alternately, the seller may decide to defer selling until the market is more favorable for sale prices. This reduces the number of homes available for purchasers on the current market.
Without definite answers on the market’s development in the upcoming months, it is important to remember that interest rates and purchase prices in any market are not the only factors that buyers must consider. Employment rates, family needs and long-term personal plans among other things, all influence this important decision.
Careful planning and discussions with industry professionals, including real estate brokers, financial advisors, and trusted counsel, who have experienced the ups and downs of the market in the past, are invaluable to any prospective purchaser.
Today’s housing market, still trying to recover from all the problems and issues that the pandemic introduced, is a complex and confusing place. A knowledgeable team of industry professionals is crucial to any buyer or seller attempting to navigating the waters of today’s real estate market.