Yay! Rates Are Going Up More! I Hate Money! Woohoo!

yay! rates are going up more! I hate money! woohoo!
This week's top headlines

U.S. Foreclosures Uptick 5 Percent Annually in July

Nationwide one in every 4,380 housing units had a foreclosure filing in July 2023. States with the highest foreclosure rates were...
 
U.S. Home Sales Fall in July to a Six-Month Low
Home sales in July were the lowest since January 2023. Sales activity for the month of July was the lowest since the so-called Great Recession...
 
U.S. Builder Confidence Falls in August, Driven by Rising Mortgage Rates
The share of builders cutting prices to bolster sales rose to 25% in August, and the share of builders using incentives to bolster sales was...
 
U.S. Mortgage Rates Hit 20-Year High in August, Above 7 Percent Now
The 30-year fixed-rate mortgage reached its highest level in over twenty years in mid-August....

 

Hey gang,
 
So this past weekend the Federal Reserve and Central Bankers along with all their uber-wealthy brethren were at an invite-only economic gathering at Jackson Hole.

Here's a picture taken at the event:

 

...I'm guessing you didn't get an invite?

I didn't either :o[

 


One of the things Jerome Powell (the head of the Federal Reserve) said was the economy hasn’t cooled as expected. He stated,
 

"We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
 

So if you didn't think rates were high enough, then I got some good news for ya.

Some people are taking a more optimistic interpretation to this news...


 

But if you're like most people, this is probably you 
 



I wanted to share something that happened recently that puts into perspective the impact the increased interest rates have on affordability, because hearing things like "7% interest" doesn't really have much meaning in the grand scheme of things.

The other day I was speaking with someone  who wanted to know what I thought their house might sell for. They shared with me their neighbor's comparable house sold for $750k and wanted to know if that was about what their house was worth.

 


Before I pulled comps and did a market analysis I asked her when that house sold and she told me it was in 2021. 

I thought this would be a good opportunity to give perspective on the impact interest rates have so I pulled out my amortization calculator and put in 750k on the price, 4% interest (what I assumed they got their loan at in 2021), 360 months, and that told me their estimated payment was $3,580 / mo.

So keeping that the same (because buyers are generally approved for a monthly payment, not a purchase price amount. the lenders calculate the total purchase price amount by taking the approved monthly payment and backing out the interest rate to come up with the purchase price), I wanted to know how much that same buyer could afford today.

So keeping the $3,580 the same but changing the interest rate to 7% it gave me a purchase price of $538,000.


 


I want to let that sink in for a moment...

that same buyer who could afford a $3,580/mo payment in 2021, which translated to purchase power of $750k, can now only afford a $538k house.

That's a reduction in over $200k in purchase power, wiped out completely just due to the interest rate increase.

That explains why our current affordability is the worst on record, according to the FHA (even worse than the 2006 bubble before the last crash):

 


Yeah but graphs you have to squint to read aren't helpful you say?

Well let's put that into perspective then

Any guesses what the average person has to make each year to afford the average house in America in 2023?


$105,000

I dunno how old you are, but when I was a kid, the concept of making 6-figures / year was a sign of true success. You really "made it" when you hit those numbers.

Now?

if you're lucky you might be able to afford an average house when you make six figures.


Yes inflation has been out of control (have you seen the price of yams????) and the Fed has their work cut out for them in fixing the mess the pandemic got us in. 

And yes, the rapid and nearly vertical appreciation we've had in the real estate market isn't sustainable and needs a bit of a reckoning so the average person can actually afford to buy a house.

Because homeowners are desperately clinging onto their 2 - 4% interest rate loans, they ain't sellin'.

And while inventory remains low, values will stay high.

And so the sad reality is the people who get the short end of the stick are the buyers in today's market.


It's not surprising then, to see that new mortgage applications are the lowest they've been in over 30 years. Who even wants to bother applying for a loan, when just 2 years ago you could afford a $750k house but today only $538k, when that house went up from $750k to over $900k due to the appreciation of the last couple years?

The winds are changing tho, it's just a matter of time. To all my buyers out there: keep your heads up.

To all my sellers out there: I don't blame you for dragging your feet in selling. Whatever your reasons for selling, it better be worth giving up your 3% loan.

That's it for today buuuuut, I can't in good conscience end a somber email on a somber note so here's a picture of a kitten in a teacup

 

(if you like kittens, check this out)

As always, my promise to you each and every week is to act as your personal assistant and help you understand what's happening in the world of real estate.

If there's something you'd like me to include in a future newsletter, please let me know!

until next week!

-realtor josh

 

Post a Comment