Almost every night on the news you hear references to the “The Fed”, “basis points” or “interest rates”. It goes over most people’s heads, but what does it mean for home buyers and sellers here in Orange County? A lot, it turns out. Interest rates impact the real estate market more than most other sectors of our economy.
Whatever direction interest rates go – up or down – it’s akin to a funnel pouring money into, or out of, the real estate market. Lower interest rates pour money in while higher interest rates drain it out. Lower interest rates mean more buyers and higher prices, higher interest rates mean fewer buyers and, generally, lower prices – or at least prices that increase at a slower rate.
Where are interest rates going?
Interest rates have been increasing and will continue to do so for the foreseeable future according to the Federal Reserve Bank, the folks who control the money supply. The Fed stated that, in all likelihood, another increase will occur before the end of the year, and at least two more increases are planned for 2018. Each increase is .25 percentage points, or, in bank-speak, basis points.
What does this mean for Orange County home buyers and sellers? The short answer is that as interest rates – and thus mortgage rates – increase, the number of buyers will decrease. Furthermore, home price increases in Orange County, which have greatly exceeded the rate of inflation, will slow over the next 12-months, at least in theory.
What Goes Up and What Comes Down
When interest rates go up, tens of thousands of potential home buyers no longer qualify for a mortgage loan because their salaries are no longer high enough to cover the increased cost of making their monthly mortgage payment. Many lenders won’t write a mortgage if a buyer has to spend more than 36% of their income servicing a loan. For example, if a buyer takes out a mortgage for $400,000 and interest rates on a 30-year fixed loan is 3.5%, they will have a monthly payment of around $1,437. If the mortgage rate increases by one percentage point to 4.5%, that monthly payment increases to $1,621, or $184 a month. Over a year, the increase is $2,208. Over the life of the loan it’s a whopping $66,240.
Across the country, we’ve already seen consumer sentiment regarding home ownership wane. A recent consumer sentiment survey by the University of Michigan reported that attitudes towards home buying fell to a 10-year low. This is due in part to increased interest rates, price increases, and the fact that middle class wages have not kept pace.
Orange County is not, of course, like the rest of the U.S. For one thing, median household income is much higher here, but so are home price
Home Sellers Will Still See Lots of Buyers
Despite the doom and gloom pronouncements of financial journalists and national opinion surveys about how interest rate increases will sap the housing market, the fact remains that there is a shortage of housing in Orange County. Most real estate brokers will tell you that, while prices are high and continue to increase, buyers are still numerous. Housing economists predict that there won’t be a slowdown in Orange County for a couple of years. So even as interest rates tick up and the cost of buying a home increases, things look pretty good for home sellers for the foreseeable future. During the first half of this year, home appreciation increased by more than 6% year-over-year. That is three times the inflation rate and almost double what you can get with a bank savings passbook account.
Don’t let the national housing news and trends depress you. Things are different here. That’s why we like living here so much.