Mortgage rates go from 3% to 7%. What does it mean for real estate in 2023?
It’s all over the news, “rates are shooting up and the real estate market will crash”! But what’s behind the headlines? What do we see on the ground here in the Roaring Fork Valley? I will never say it enough: real estate is local and we can’t base our decisions on the national headlines.
What is happening.
The Federal reserve is trying to cool down inflation, and changing the interest rate is pretty much the only tool they have. When all you have is a hammer, everything looks like a nail, and they have been using the “interest rate hammer” heavily over the last few months.
Real estate is such a great investment because the financing options are quite easier and cheaper than most of the other investments. There are no margin calls, rates can be locked up to 30, or even 40 years. There are also many tax advantages… The government has our back! Unfortunately, we are on the front line when they decide to raise interest rates.
How bad is it?
To be honest, today’s interest rates are still historically low, and the Fed has ramped up their tightening in more dramatic ways in the past. Just look at the graph below.
Fed funds rate since 1955. Source: https://fred.stlouisfed.org/series/FEDFUNDS
So what is all this fuss about? Well, the real estate market today is geared towards a 3% mortgage rate. Now that the mortgage rates are over 7% nationwide, numbers don’t add up anymore.
Real life, local examples:
This is what a 7% mortgage rate looks like on the purchase of a single family home for the average price in the different towns of our area, with a 20% downpayment:
Monthly payment at 3% and 7% for the average sale price per town
Rifle: average sales price: $494,647 Down payment: $98,929 Monthly payment at 3%: $1,668.36 // Mortgage payment at 7%: $2,632.72
Silt: average sales price: $724,750 Down payment: $144,950 Monthly payment at 3%: $2,444.46 // Mortgage payment at 7%: $3,857.42
New Castle: average sales price: $613,611 Down payment: $124,720 Monthly payment at 3%: $2,069.61 // Mortgage payment at 7%: $3,265.90
Glenwood Springs: average sales price: $1,066,690 Down payment: $213,338 Monthly payment at 3%: $3,597.77 // Mortgage payment at 7%: $5,677.37
Carbondale: average sales price: $1,242,071 Down payment: $248414.20 Monthly payment at 3%: $4,189.30 // Mortgage payment at 7%: $6,610.82
Basalt: average sales price: $2,131,875 Down payment: $426,375 Monthly payment at 3%: $7,190.46 // Mortgage payment at 7%: $11,346.73
I’ll spare you the calculation for Aspen and Snowmass, where most transactions are cash. But you get the idea: The increase of interest rates have changed the monthly payment in a material way. The price of money effectively more than doubled.
What’s going to happen next? Cash buyers’ psychology will be key
Each town in our valley will be impacted differently. Towns where cash is used more than financing will be impacted less:
Lower down valley than Glenwood, higher interest rates should have a bigger impact on the market. Buyers buy what they can afford, and it will be less. Expect prices to take a hit from from New Castle down in 2023.
Glenwood and up: Cash heavy buyers’ sentiment will be key. Buyers with 20, 30, 40% or more of down payment are the ones who pushed prices up. If they keep buying, they’ll maintain today’s prices. If they pull out and buyers financing more of the purchase price have to take over this area, prices will fall. Before 2020, the level of wealth of buyers in Glenwood, Carbondale and Basalt was lower than it is today. The median price of a home last month in Glenwood was over $1 million. In the areas where cash heavy buyers rule (Glenwood to Aspen), buyers buy what they think will increase in value, and/or what they want. It’ll take a while for the excitement of the last few years to tame. Inflation erodes the value of cash and real estate is a good hedge against inflation. Even in a slower market with less growth outlook, wealthy buyers will keep purchasing second homes. Between Glenwood and Aspen, the exciting listings (on the river, views, on the slopes etc…) will sell. But the days when anything would sell at any price are gone. Cash buyer’s psychology will be the number one determining factor for where prices go in 2023.
With buyer motivation being down, the level of inventory will be what determines the price of real estate in the next 12 months. You can hardly expect this new pool of buyers to have to sell in a downturn. The golden handcuff of 3% mortgages will also keep inventory under control.
Fundamentals are strong in our area, properties that represent a good buy (irreplaceable locations, zoning etc…) will still attract buyers.
Summary
Don’t expect prices to fall across the board. A limited inventory and the strong fundamentals of our area will create a baseline for how far prices could fall.
Properties that will hurt most: the weird ones that only sell in a good market, properties with deferred maintenance, areas where down payments are low
Properties that will still do well in 2023: good locations, properties geared towards cash buyers.
A note from our preferred lender, Mike Picore at Bay Equity
“How to Escape the Storm
Lenders have been busy coming up with alternative solutions to a rising rate economy which has pushed monthly payments up in record time, but there is hope……
One of those solutions is what is called a 2-1 Buydown which keeps interest rates 2% below market the first year, and then 1% below market the 2ndyear and then adjusts to the market rate on that 3rd year.
For example, if rates are 6.50% (currently), then under the 2-1 buydown that rate drops to 4.50% for the 1st year, and then 5.50% the 2nd year. This allows the borrower to get a payment and rate below current market while we wait for rates to come back down.
At that point, the lender would help the borrower achieve a lower monthly payment for the first 2 years and then hopefully when rates drop-lock into a new lower rate/payment loan
Another option that some lenders are using is a Heloc purchase/bridge loan, in this case the borrower purchases the property under a HELOC program and it gives them an interest only payment-which is much lower than a principal/interest payment. Some of these programs have variable interest rates, that adjust as the market adjusts, so you always want to check in with the lender for the specific terms and check with your mortgage lender if that is an option that is right for you.”
