Here’s a little perspective on the continuing increase of the 30-year, fixed-rate mortgage. Several months ago, I did an analysis of the average fixed-rate mortgage rates starting in 1971 recorded on Freddie Mac’s website. At the time, something told me that I should hang onto this research, however, I had no idea how much I would be referring to it during the past couple of months.
Since the Federal Reserve decided to increase interest rates in an effort to control inflation, the housing market has been substantially disrupted. Currently, the U.S. mortgage rates have reached their highest level in more than 13 years. The average interest rate for 2008 was 6.3% and we are already seeing rates at or near 6%. In June, the Federal Reserve increased rates by 0.75% points and Fed Chairman Jerome Powell indicates things are not likely to change soon. He hints that at the July meeting there will be another 0.75% increase. Mortgage rates don’t automatically increase when the Fed raises rates, but they are heavily influenced by it.
What we’re seeing happening around the country and in Florida is a decline in the number of sales, not a decline in sale price. Even though there is some increase in the number of new properties hitting the market, it is so marginal it doesn’t even come close to providing enough inventory to satisfy hungry buyers. In Manatee County in May, the supply of single-family homes finally exceeded one month, which is anemic when you consider that a six-month supply of available properties has traditionally been the benchmark for a healthy real estate market.
Complicating the availability versus demand ratio even further is the fact that so many homeowners refinanced their mortgages when rates were under and just over 3%. These homeowners have no incentive to sell any time soon and move on or up to another home. Even potential retirees are rethinking the benefit of selling, helping to freeze the market, not to mention the pandemic providing a new way to do business remotely, allowing employees to work from areas of the country with lower housing prices shifting the market.
Because the interest rates were so low for so long, buyers were able to purchase larger and more expensive homes. However, now with less purchasing power, young buyers are facing the reality of settling for a smaller home with fewer amenities in an area they may not really want to be. Housing costs in the country have jumped from 24% of the average household budget in the early 1970s to 27% in the late 1980s to 35% in 2019 with higher housing costs likely to come based on the increase in sale prices.
Most real estate professionals and economists don’t see prices going down. Goldman Sachs estimates housing prices will grow around 10% this year nationally and Bank of America forecasts 15%. So, it doesn’t look like the Federal Reserve’s plan to lower the heat on the housing market by increasing mortgage rates has worked; there is still a huge demand for properties. It has, however, brought a lot of pain to first time and marginal buyers.
Tony Veldkamp, the president of the Realtor Association of Sarasota and Manatee wisely says, “If the time is right for someone to purchase a home, they should not let interest rates deter them if they can afford the increase in payments. Homes can be permanent, whereas interest rates are temporary.”
I agree. The big picture is that interest rates are still low relative to other times in our history, and that’s my perspective.
