Rates in Review
As we usher out 2022 and begin to embrace 2023 a little reflection is natural. Typically we reflect on goals achieved and those not met, and wonder how 2023 is going to be different. Before we set out new goals and mentally prepare on how we’re going to achieve them, let’s first digest 2022.
Let’s look back to what the interest rates looked like on the start to our previous new year. According to rocket mortgage, the national average interest rate for a 30-year fixed mortgage on January 1st 2022 was 3.22%. As of writing rocket mortgage puts the national average 30-year mortgage at a whopping 6.875% interest rate. Okay, great interest rates are going up, but what does this mean? Using those same #s a $300,000 mortgage on January 1st of 2022 would have cost you $1,301 in principal and interest payments, today that loan amount will cost you $1,971. That’s a whopping $670 a month difference, and $8,040 on an annual basis. To do this exercise you can use google’s mortgage calculator. It’s a tool I use when I’m quickly evaluating cash flowing properties. Now what has been the impact of these rate raises? The average price per square foot of homes sold in MA from Q1 of 2022 to Q3 of 2022 has decreased by $16. Now when you’re looking at that figure a 2,000 square foot house on average has only decreased by $32,000, not nearly enough to off set the increased rate payments.
Here’s a common statement I’ve been hearing “the markets coming down why don’t I wait it out?'“. Hard assets like homes don’t drop in price overnight, especially in relation to electronically traded assets ie. stocks. According the the St. Loius Fed housing data, the real estate market peaked in Q1 of 2007 with the national average price per home at $322,100. The market then bottomed out in Q1 of 2009 with the national average home price being $257,000, the market stayed relatively low till Q4 of 2011 where the national average price per home was $259,700 where the market then recovered. The point of this information is to show how slowly the real estate market can move. Some folks are sitting on the sidelines waiting for prices to decrease. This sounds like a reasonable strategy, the reality in what strategy makes sense for you is dependent on your situation. The Fed in it’s latest meeting said it was going to ease off the severity of rate increases, however, Powell did not indicate he was going to stop increasing rates. Looking at the data above, despite paying more earlier in the year you would have been better off purchasing a home then, even if it was a slightly higher purchase price.
Now what should you do? Ultimately that decision is your own. If you’re a seller, don’t get caught up on potentially missing the top when the market is still a seller’s market. That question becomes a little more difficult for buyer’s, rates look like they’re going to continue to increase, prices in theory should decrease, if you’re looking to purchase your forever home does price volatility effect you, not nearly as much as someone looking for a starter home. In the end the best suggestion is to educate yourself as much as possible then decide what’s right for you. Along the way be sure to leverage great relationships and professionals that add value to your experience.