Home Buyer Affordability Drops by Over 10%

Want a sobering fun fact? A 1% mortgage rate increase cuts home buyer affordability between 10%-11%. In January, Timmy had a very nice $450K home in his sights but was annoyed with the price and having to compete with other buyers. He lost it. He then found two more solid fits at $465K and $445K, liked them and felt his offers were right on target. Losing both, he decided to wait for the "spring" market because he knows that prices will come down as inventory increases. While waiting, his mortgage rate went from 3.35% to 4.72%; a whiplash rise of 1.37% and one that forced Timmy's budget to decrease between $65K-$75K. Timmy waits; chin in hand with Lassie who is beyond pissed with him for blowing several good opportunities. "Surely the spring market will change things Girl". He's not alone. But in this hoard of similar buyers are many that unequivocally state "I'm winning the next house and ending this"; they're committed to getting off this ride. Will rates blow past 5%? Will there be an increase of inventory? Will prices stabilize? Will the Fed get inflation under control? Lassie does some crazy things, but even she's dizzy right now.

Some buyers, especially first timers, are already struggling; rising rates will likely be the knockout punch for several. Many buyers (like Timmy) continue to wait for prices to stabilize or don't want to engage in bidding wars; others refuse to waive some or all contingencies. Others are waiting for the perfect deal to come along. Yet others decided to bite the bullet, deal with the market and secure a home. While most economists agreed that we’d see 4.5% or so interest rates by the end of 2022, no one expected 4.72% in mid-March 2022. That “Covid Freebee” hangover is beastly; record "transitory" inflation isn't so transitory and the the pain is real and here to stay for a while. It now falls to the Fed to control and they signaled this week (3/21/22) that they will act. Chatter is that they will increase rates by 50 basis points in both May and June, and by 25 basis points rises at each of the four remaining meetings of 2022. That would put rates at levels not seen in well over a decade. However, accuracy of "forecasts" like these isn't so great these days...

The Real World

As rates rise, affordability goes down. For every 1% increase in interest rates, buying power decreases between 10%-11%. Consider Timmy; he has $1500/month to spend on a home and qualifies for a 20% down, 30 year loan. Just on the mortgage – never mind the other dozen expenses that come up – Timmy gets squeezed like a lemon. He's not buying that $450K home now; he might get one around $375K-$390K and like it.

In a market like this, decisions have to be made; is it buy now and get it done or wait to see what develops? The buyers that have been waiting may regret it. Prices are jumping to be sure, but how does that compare to the jump in rates? A 1% hike translates to about a 10%-11% reduction in purchase power. Will prices settle? Will rates settle…in the high 5’s or 6’s?

No Home for You

Lot’s going on below – and a ton of great info. This is from the National Association of Home Builders and focuses around the $412K median price of a new home. It’s easy to see the how the variables and affordability change with increasing rates. Also clear is how many households get knocked out of the game and can no longer buy. This is exactly what Wall Street is betting on, renter nation.

Print That Money

The reckless abandon of the last couple of years is clearly illustrated in this chart. When Covid hit, the government literally handed out money. The Fed restarted purchases of mortgage backed securities (MBS) to ensure artificially low mortgage rates. Starting in From March 2020 through mid-January 2021, more than $1.32 trillion was spent. The current balance of MBS is now over $2.68 trillion; doubled since March 2020. In comparison, during the 2010-11 crash, the Fed spent $1.25 trillion. Injecting this kind of money – and the trillions outside of MBS buys – is like giving crack to a circus chimp. Show must go on but what happens when it comes down?

Note the rates from the crash years through 2019; the recovery is clear and as the economy hummed the rates were generally stable. Once Covid hit, all bets were off and rates were artificially squashed. Clearly the Fed is through with all of this, now we’ll see how hard it hurts.

Measured Risk

There's always a reason not to do something. The industry makes buying a home seem like a fun adventure, it isn't. In fact it tends to be emotionally draining, chaotic, rushed and all in all, thoroughly exhausting. Rejection must be embraced and expectations tempered. However, to be successful, measured risks may need to be taken. There's a huge difference between being reckless and stupid; and assessing the situation and taking a measured risk.  Every situation is unique and what it takes to be competitive and ultimately win, will vary. For some - like Timmy - standing on ceremony is worse than just considering an "outside the box" move.

Rates, inventory, the economy...all things that cannot be controlled. What can be controlled is preparation, a definition of success and an ability to adjust as obstacles appear. This is a rough market and challenges are present, but markets are fluid and just like a decade ago, this one will eventually find balance. Of course, once that happens, something will toss it up in the air yet again. We're kicking around this business for over 30 years...let us know how we can help.

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• mortgage rates (2)
• buying power (1)