April Market Update: How Rising Rates Affects Your Offers.

Are you looking to buy a house? It feels like everyone from the guy in the Starbucks queue behind you to the coworker whose name you can never remember is looking through Zillow daily and eagerly sharing their predictions and stories on the housing market "bubble". I wanted to explain a little about "borrowing power".

Risng interest rates typically drive down home prices, but that isn’t happening yet in Orange County. Combined with the SoCal housing shortage and continued rising rates, most buyers’ affordability is declining (literally) weekly. Rates have climbed their way up to 5%

According to the Mortgage Bankers Association®, interest rates have risen from 3.31% on December 29th to 4.8% on March 30th, representing a 45% increase. The purchasing power for buyers has rapidly eroded in such a short period of time. For a buyer looking to put 10% down and desiring a $4,000 per month payment, at the end of December they were looking at a $1,013,333 home. Today, that same buyer is now looking at homes just below $850,000. Another way of looking at it is how much more the payment is on a $1 million home. At 3.31% with 10% down, the payment would be $3,947 per month versus $4,772 per month at 4.8% today. That is an additional $884 per month, or $10,608 per year. Persistent higher rates will eventually diminish demand and, ultimately, throttle back the housing market. The pool of buyers able to purchase shrinks as rates rise.

Outside of the previous week’s 3.7% drop in borrowing power, this was the worst week for mortgage shoppers since 2016 and the 20th-largest drop since 1971. By the way, the top drop was the week of March 14, 1980. That’s when rates went from 14% to 15% creating an 8.6% drop in borrowing power. Remember that with rates bumping up off historic lows, increases of a fraction of a percent can be as financially painful as jumps of multiple percentage points in the era of double-digit mortgage rates.

The Fed wanted to slowly nudge rates higher in an attempt to cool the overheated economy’s inflation problem. But inflation is worse than feared, hitting levels last seen in the 1980s. And this year’s Ukraine conflict upset energy and financial markets also.

Thus, housing in 2022 must digest the unexpected

So, think back three months to the holiday season. Just 15 weeks ago the Freddie Mac average hit its most-recent low of 3.05%. Now we are up 1.78 percentage points since the days right before Christmas. Do not forget, for the house hunter using a mortgage, this rate surge is a shocking slash to how much house they can buy.

looking at ones borrowing power clearly shows the house hunter’s pain from what might seem like a modest rate blip. That hypothetical $2,500 monthly payment today gets you a $91,000 smaller loan than what was available near 2021’s end, a 15.% drop in just 3 months. That’s the eighth-largest three-month dip in the past half-century. The seven other massive declines came in that ugly spike four decades ago. The largest was during the three months ended April 4, 1980, with a 20% loss of borrowing power as rates from 12.85% to 16.35%.

A home buyer today must deal with pricier rates and record-high home prices. The SoCal Median selling price for February hit an all-time high of $760,000 – up 12.6% in a year. With the hit to borrowing power buyers need to have either rich relatives, investment profits or receive a huge raise! If not they face having far less money for house shopping or must take extra financial risks to get a home purchased. None of this is good for the health of the housing market.


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