Rates have been very volatile recently and just as we saw historically low rates last year, this year we are seeing rates significantly increase over the past few months and are now at the highest rate since 2010.
The historically low rates — which were as low as 2.65 percent in January 2021 — were a direct response from the federal reserve during COVID to help support the economic recovery.
Higher interest rates can have a big impact, especially on first-time home buyers who are already struggling to buy a home in this market. They may now have to reduce their purchase price to take into consideration the higher mortgage payment.
An example of the difference a one percent and two percent interest rate increase will have:
$500,000 loan amount with no taxes, fees or PMI
4% = $2,387
5% = $2,684
6% = $2,998
It’s a general rule of thumb that for every one percent that interest rates go up, a buyer loses 10 percent of buying power. Some buyers may no longer qualify for a loan at the higher rate.
Higher rates will also keep some sellers out of the market. If they refinanced or purchased a home at the lower rates, they are less likely to want to sell now and lose their cheap rate.
If we are conservative compared to last year and calculate a 20 percent price increase on a $500,000 home, the purchase price would be $600,000, which would increase a monthly mortgage payment at 5.5 percent interest rate from $2,839 to $3,407.
HOME PRICES
With home prices continuing to increase, the bigger threat may not be the interest rate but the purchase price. The median sales price for March 2022 in the greater Phoenix area was $462,000 compared to $360,000 in March 2021, which is a staggering 28.3 percent increase year-over-year and there is no sign that home prices will be coming down.
We have seen a little softening in the market and are coming into the seasonally slower market as the second home buyers leave and we head into the hot summer months. While there are no sign home prices will be coming down, we do expect the increase to be weaker for the third quarter. So, if you are looking to purchase a home, the next few months may be the best opportunity before rates increase more and while home prices settle a little during the summer months.
RELOCATION
Rates don’t have any impact on cash buyers, and as anyone who is trying to purchase a house knows, there are a lot of cash buyers out there right now. Phoenix is still one of the fastest-growing cities and saw the biggest population growth of 81,000 residences last year according to Redfin.
With many relocating from California and Seattle, they are selling their expensive homes and bringing that cash to Arizona, where they are purchasing a lot more for a lot less.
With more people working from home and moving across the country and living where they want to be rather than where they have to be, sunny Arizona is a top destination.
HOW INVESTORS IMPACT THE MARKET
A great indicator of the market is to look at what investors are doing — as investors buy in a sellers’ market. IBuyers such as Opendoor and Offerpad are still very strong players in the market, buying homes to flip while other institutions are buying homes as rentals. For the investor, residential real estate looks like a safe haven and a hedge against inflation. As long as the investors are buying you can expect to remain in a seller’s market.
TO SUM IT UP
Even though rates have increased they are still low, investors are still buying, and prices are still increasing, just maybe at a slower pace. With Phoenix being a top desirable city to live in, demand will remain strong. If you would like more information or are thinking of buying or selling your home, please don’t hesitate to contact me.
Lorraine is a Multi-Million Dollar producing agent, has been a full-time Realtor for over 13 years, is an Associate Broker of KOR Properties, a Certified Negotiation Specialist, and is on the Professional Standards Board. You can reach Lorraine at (602) 571-6799.