The Real Estate Shift Is Here – Expect Prices to Drop
Over the past two years sellers have reaped the benefits of increased property values. A low inventory of homes on the market over this time was only an extension of a pre-pandemic trend. Based on supply and demand, a low inventory of homes combined with an overabundance of buyers means property values will go up. Buyers have also helped to increase property values. Most buyers got caught up in the emotional side of the buying process and couldn’t help but overpay for a property.
The proposals to purchase one of my listings had offers that varied by $200,000. A buyer on another listing of mine paid $50,000 over other comparable properties, waived the home inspection and was willing to pay another premium if the property didn’t appraise for the contract amount.
Upcoming moves by the Federal Reserve will likely prevent buyers from overpaying for properties and force property values down.
The Federal Reserve has indicated that there will be three to four interest rate hikes this year. Some experts think there could be seven to eight rate hikes to slow down and decrease inflation.
Increased interest rates, reduces the buying power for individuals. This results in lower property values for sellers. For every point that the cost to borrow money increases a buyer loses $10,000 of buying power for every $100,000 borrowed.
For example, if you are comfortable making monthly payments on a $200,000 mortgage and the interest rate goes up one point you will now only be comfortable buying a home with a $180,000 mortgage in order to maintain the same monthly payment.
If each interest rate increase varies from ¼ to ½ percent a buyer could be looking at an interest rate increase of 1 to 2 percent by the end of the year. In the example above a 2 percent interest rate increase would reduce buying power by $40,000, resulting in a mortgage loan of $160,000.
If you are a frustrated buyer because you keep losing your dream home in a bidding war just have patience. The prices are coming back to you. Sellers who feel they don’t want to miss out on the recent prices for homes will help to increase inventory by listing their homes. This in turn will also help to reduce home prices.