By now you probably have heard that interest rates have risen to a 20-year high, but how exactly is this affecting Real Estate sales and prices? The Federal Reserve (the Fed) raises interest rates to slow demand for goods and services as with higher interest rates things cost more over time. The Federal Reserve does not directly affect mortgage rates as the rates the Fed control are only the rates that banks borrow from the Fed. This makes the cost of money to banks cost more so Banks raise their rates to the consumer to cover the increased costs to them. Since consumers get loans from Banks to buy cars, homes, consumer goods, and services the costs for all of it go up. In the mortgage arena, we have seen rates go from the low 3’s in January of 2022 to the low 7’s currently.
It should be obvious that a consumer will be able to buy less of a home in a high-interest rate environment, but home buyers don’t really understand how much it actually affects their buying power. An example would be a couple who has been making an income of $100,000 combined with a normal debt load of a car payment of $500 a month and student loans of $250 a month. This couple could afford a house with a 3% mortgage rate and 5% down at $561,000 sale price. At a 7% interest rate the same couple can now only afford a house priced at $356,000. This a $205,000 difference that has occurred in less than a year. This will hold true when qualifying for auto payments, business loans, and all loans to buy goods and services.
So with the diminished buying power of potential home buyers, you would think that Real Estate values will go down to accommodate the higher interest rates. You would be right in your assumption. This holds especially true in the higher priced homes where the people that were qualifying for a million-dollar mortgage can now only qualify for a $700,000 mortgage. Home sellers are having to come to grips with the fact that their home is not sellable at the same price it would have been a year ago. With older folks looking to retire in the next 5-10 years they are seeing the value of their Real Estate portfolio go down, and this may hold off their plans for retirement and holding on to their long-term jobs not making room for younger folks to fill the gap. Furthermore, the older generation has seen this before so they will be extra cautious with their money going into retirement and possibly not selling their family home to downsize for retirement as they may have originally planned.
The higher interest rates are pushing Real Estate values lower and this is making investors worried to the point they are holding back investing in Real Estate taking out a whole segment of Real Estate Buyers. As prices decrease you will be seeing appraisals come in lower-than-expected making selling a house more challenging when the sale depends on an appraisal. Those particular sales may fall through if sellers are not willing to lower their prices and eventually, if they need to sell, they will have to sell at a lower price. If interest rates continue to go up, and it is looking like this will be the trend, prices will have to continue to go down to accommodate those that can no longer afford to buy in the same price range as the lower interest rates would have allowed them to. The higher rates thin out the potential pool of home buyers as their buying power has diminished and those folks looking to move up by selling their existing home and buying a bigger one have dried up as well.
From a lending aspect, as rates rise, lenders know that the home values will be decreasing so the appraisal is going to be a much more important part of the transaction. FNMA and FHLMC will be cracking down in different markets where they know the prices are softening faster than other parts of the country, typically in higher-cost areas like California. Since MAE Capital Mortgage also does Private Money lending, we are seeing private individual investors who actually lend their own money to others, tighten up their requirements as well. This means less available funding for fix and flip programs, After Repair Value (ARV) programs, investor buy and hold programs, commercial funding, and more. Talking about commercial funding where that market has been killed essentially by COVID and Amazon coming in to fill the gap, has gotten even worse. As investors see the rates go up, they are less likely to buy or lend their money for Real Estate of any kind.
To conclude, higher interest rates make it more difficult for home buyers to buy homes that fit their needs. High-interest rates make home values have to come down to be able to sell their homes. Higher interest rates make the desire to invest in Real Estate and Real Estate Notes and Deeds a whole lot less. Higher interest rates make commercial lending even worse and make commercial values continue to decline. So, all in all. higher interest rates are not good for Real Estate values, resales, investments, and rehabilitation of real estate. If you are a potential buyer of Real Estate, you need to make sure your offer is a bit lower than the current market supports as prices will continue to fall as rates rise. If you are a potential seller of Real Estate, do it now before rates go even higher and be flexible in looking at lower offers, if you are not flexible you will not be able to sell your property in this crazy Real Estate market. On the bright side if you are well qualified first-time home buyer it should not matter to you what rates are so long as you can afford the payment associated with the house you want to buy. As a first-time homebuyer, you now have more inventory to choose from and if you buy now and interest rates continue to go up you have a low mortgage and an affordable payment, when interest rates go down in the future you can always refinance to the lower rate. So don't be afraid of rising interest rates as there is no perfect time to buy real estate but what I have seen over the long run owning is far better than renting so do it now and join the club of home ownership and let MAE Capital help you with buying your home and financing it as when you bundle with us you get perks like money for closing costs and an easier experience.
When it comes to creature comforts, little ranks higher than feeling safe. There are many ways we work toward creating a living environment that promotes security, and improved security often means higher home values and lower home insurance premiums. From MAE Capital Mortgage Inc., here are some of the key security solutions for homeowners and what you need to consider when listing a home.
We all use doors and locks to secure our homes, but your choices can impact how truly safe your household is. As Safewise explains, most burglars enter homes right through the front door, so selecting a secure door is paramount. Steel doors are the most economical, and there are hardwood choices that are very attractive. Avoid sidelight windows for optimal security, or consider installing security film to add peace of mind.
When it comes to locks, certain kinds of deadbolts tend to be more resistant to break-ins than others, and you can reinforce entryway doors and locks to bolster security. Lighting can also play a key role in home security. Think in terms of exterior lights that can reduce hiding spots for criminals, motion-activated versions, and interior lights on timers.
Rethink Your Landscaping
When viewing your home from the exterior, try to do so in the mindset of a burglar. Look for nooks and crannies that would shield people from being viewed by passersby. Overgrown landscaping close to your house provides cover for would-be thieves, so SFGate points out that you should take steps to shear shrubbery back to no more than two feet tall. At the same time, a tall, protective barrier around the perimeter of your property can effectively keep scoundrels out, especially if you choose greenery sporting spikes and thorns. Installing a shrub barrier can be a significant undertaking, so consider hiring a pro to do it for you. With the right tools and equipment in hand, they can knock it out quickly and save you the backbreaking work.
Smart Home Locks, Doorbells, and Cameras
If variety is the spice in life, smart locks and doorbells -- all part of smart home security -- offer ample seasoning to pick from. As opposed to conventional security systems that require you to turn it on or off every time to enter or exit your house, a smart system is on 24/7, negating the need to remember to arm it every time you leave home. What’s more, some smart systems have motion sensors that trigger emergency notifications if something seems suspicious.
Smart home security has come a long way since conventional security. It’s all now very intuitive; in addition to tracking main entry points into the home, a smart system can track behaviors and alert you via text. One example is if a thief cuts your phone line (a typical first task before breaking in), your smart system can send you an alert if it ever loses the connection.
Smart locks alone offer options ranging from notifying you when someone arrives at your home to special codes for each user, voice activation, temporary codes for guests — and everything in between. You can often make changes to settings from your smartphone, and some offer keyless touchpads in case you lock your keys or your phone. Smart doorbells offer a live feed straight to your phone so you can see in real-time who is at your door. Some record the activity for your review, while others offer interaction with the visitor. Smart home security cameras offer a number of interesting features as well, such as voice activation, facial recognition, cloud storage, and emergency services monitoring.
Selling Your Property
With the advent of technological security systems, selling a well-reinforced property is slightly more complicated, but it’s a worthwhile investment. Security systems can catch a prospective buyer’s eye, and at the same time, being recorded can be off-putting to some house hunters. One suggestion is to hang a notification at your entryway indicating that a system is installed and whether it’s in use at the time of a showing. When your property does sell, you should ensure all smart home devices are returned to factory settings and notify technical support there is a change of ownership. If you intend to remove the devices when you move out, you should discuss the situation in detail with the homebuyer in case they intend to replace some or all of the gadgets. Be forewarned, however, that it may be up to you to install adequate replacements for certain items, so you should investigate your responsibilities.
Security means peace of mind for you and your loved ones, and it can also influence the sale of your home. Think about what will be attractive to house hunters and what will put your mind at ease while boosting your home value. With a well-thought-out plan, you can rest easy.
Are you ready to buy a home? Contact MAE Capital today at 916-672-6130.
The article was written by Natalie Jones
2018 started off with relatively low interest rates but in the last few weeks interest rates have been on the rise. The stock markets have hit record highs and the economy has added over 200,000 new jobs. Although the Stock has corrected and has become volatile in the last week or so it is still trending over 24,000 points, the highest in it’s history. So with the strong stock market and new jobs interest rates are rising to slow inflationary pressures, a kind braking system to the economy. In order to understand this affect to the equity markets (Stock Markets) and why it signals coming inflation, we have to break it down to why it is happening. As people make more money and buy more things that puts a pressure on the supply of goods and services and when there is a stronger demand for goods and services prices will tend to go up. As prices go up for goods and services the Federal Reserve will raise interest rates to slow the demand down as the higher prices for credit (higher interest rates) will slow people from purchasing goods and services, in theory.
The theory of fighting inflation by raising interest rates has been a policy of the Federal Reserve Board since the 1970s. So, when the interest rate markets see any possibility of inflation they will tend to start the process of raising interest rates in anticipation of the Federal Reserve raising them. This is what we have been seeing since the first of the year. Several events have happened to signal possible inflation in the future and as they unfold we see the markets adjusting to stay in front of what the Federal Reserve will do with interest rates when they meet at their monthly meetings. One of the major events that is signaling inflation is the lowering of the corporate tax rate to 20%. It seems people in the media and some closed-minded folks think that by lowering corporate taxes helps the rich some how when, in fact, it helps the American middle class people far more. This is simple economics that is not taught in our public schools.
To fully understand this, you must first look at corporations as tax pass through entities. When a corporation pays higher taxes they just pass that cost through to the consumer in the form of higher prices for their goods and services. Higher taxes also mean a big corporation will limit how much money they keep as profit in the U. S. as opposed to taking that profit in a country with lower taxation rates. The money saved by the lower tax rates will tend to keep the money in the US and will be re invested to hire more American workers and keep dollars in the US. Thus; more money in our economy for the American people to spend and eventually driving up prices causing inflation and forcing the Federal Reserve to raise interest rates to slow the economy down. You see, if the economy grows too fast then there will be a higher demand for goods and service than they can be provided and that will cause prices to go up. The theory has been to raise interest rates so the flow of money slows down with the higher cost of money. This is a confusing topic for most people that don’t have a degree in economics like your author, but if you understand these basic principles you can not only save yourself money, but you can make money by knowing what is coming.
So how does this relate to Real Estate you ask? Knowing the economics behind the economy you can make better decisions as to when to buy home for investment or when to lock in your interest rate on your home or when to refinance and save on your monthly payment. What this tells me about this year in Real Estate is that it should be a hot year for Real Estate Investment on both the Residential side as well as the commercial side of Real Estate. A smart investor will note the economy is starting to improve and more people will have more disposable income to invest thus driving up Real Estate prices. We have seen this happening in the residential sector for a few years now but it did not have to do with a strong economy as so much as the lack of supply of homes. We have seen builders come back into the markets where they can build, and the supply of homes has increased to offset demand. In the markets where builders can not build, due to lack of land, we have seen prices increase to astronomical levels. IN some markets the Government has kicked around rent-control which would limit the amount of rent a landlord could collect in a certain area. The result of rent control would be more run-down real estate, lack of new investment and corruption. The Government should let the free markets figure out where rental prices should be as well as values. As you can tell I am a firm believer in free markets and less government involvement as history has shown that when governments intervene in economics it causes markets to tighten as people and companies have to spend more for compliance of the government regulation that enviably hurts the very consumer they are trying to help. I know the what the argument is from the other side is but it makes no economic sense as every result of more government is higher prices to people, bar none.
In conclusion my advice to potential new home buyers is to lock in their interest rate as soon as they can when they are buying a home in this market. If you have been contemplating refinancing your home my advice would be to do it sooner than later as you will be facing higher interest rates. If you are looking to invest in Real Estate, again do it sooner than later as you will not only get a lower interest rate today than you will tomorrow, but the prices of the Real Estate Investment will be lower today than tomorrow. Interest rates will be common place to be in the 5%-6% range for residential homes in the next 30-60 days from February 7, 2018. For more questions on buying Real Estate or Refinancing or even commercial Real Estate give us a call and we will help you with all your Real Estate investment needs. Again, MAE Capital Real Estate and Loan 916-672-6130. Update to this article 2/22/18- Rates continue to rise due to all the factors listed above and now the Federal Reserve has also said they need to counter inflation by raising rates. I will predict that interest rates will be consistently in the 5's by mid summer. So if you are looking to refinance to take cash out to consolidate bills, pay for college, or home improvement I would suggest that you push up your time frames and get it done now so you can lock in a lower interest rate. It is simple, call one of our qualified Loan Officers and lock you interest rate in today. Update: March 5 2018, Interest Rates still are trending upward although not as fast as we have seen. Again the stance we are taking is to lock our clients in as soon as we can to get the lowest rate possible. As a Broker we are trending about 1-2 points lower in fees or about .125%-.25% better in interest rates than our Mortgage Banking friends.