Spring is here which also means the hottest season in the real estate market! Typically, Spring is the season when inventory rises and demand surges and peaks.
However, these past months have been an anomaly to past real estate trends. Since November 2020, the market really started heating up and has not stopped. Homes are flying off the shelves in days and generating an overabundance of offers. There is very little supply and way too much demand fueled by low mortgage rates.
However, there is shift brewing behind the scenes. Rates have already risen from 2.65% in January to 3.125% as of this week. With the increase in mortgage rates, we may start to see the real estate market become more balanced, but I think it will still be a sellers market for a while. Currently the market is appreciating at about 1% a MONTH which is insane! A regular hot sellers market appreciates at 4% to 5% per year.
Sellers: Now is the time to sell with limited inventory, high demand, and record-high sales.
Buyers: Although the market can be frustrating with low inventory, now is the time to buy with interest rates starting to rise.
There are fewer homeowners coming on the market compared to the 5-year average. During February, there were 209 fewer new for-sale signs in Orange County, 6% less. This trend continued from January when there were 92 fewer homes, or 3% less. The new trend is due to the lack of available replacement homes that have many homeowners spooked about selling. They are fearful that there will be “nothing to buy”, limiting the number willing to participate in a market with such limited homes to purchase. The luxury end, all homes above $1.5 million, accounts for 39% of the inventory and only 15% of demand. For homes priced between $750,000 and $1 million, the expected market time is 13 days. This range represents 16% of the active inventory and 26% of the demand. For homes priced below $750,000 the expected market time is 16 days. This range represents 29% of the active inventory and 39% of demand.
With the lack of inventory being touted daily it might be discouraging for buyers to continue the pursuit in purchasing a home, but if we look at the consequences of waiting it will keep them motivated. It is important to focus on the monthly payment in purchasing a home today and compare it to delaying until the end of the year. An $875,000 home purchased today with a 20% down payment yields a monthly payment of $2,999 at the current interest rate of 3.125%.
According to Freddie Mac’s Primary Mortgage Market Survey®, rates started the year at 2.65%, an all-time record low, and have since risen to 3.125%. That is nearly a half a point higher in just a few months. By year’s end, rates are forecasted to hit 3.75% or higher.
That means that the $875,000 home example above will appreciate to $945,000 in December. Match that up with the expected 3.75% mortgage rate, and the monthly payment blossoms from $2,999 to $3,501 per month, an increase of $502 every single month for the life of the loan. That is $6,024 per year or $30,120 in five years. This example only factors the increase in the principal and interest payment. The 20% down payment for $945,000 is an extra $14,000 down. Property taxes go up too. With the average tax rate of 1.1%, that amounts to an additional $770 annually.
In the end, it all adds up to a lot more out of pocket expense on waiting until the end of the year to pull the trigger on a purchase. There is a definite cost to waiting even though the current market is extremely frustrating from a buyer’s perspective. There is a higher monthly mortgage payment. Down payments are larger. Property taxes are higher.