How Changing Interest Rates Will Impact Home Prices
The next chapter in real estate is coming
The real estate market has been volatile, with expected interest rate changes in 2024. Pros are preparing for more turbulence.
Keep reading to find out how this might affect you, especially if you're thinking about buying or selling a house soon.
The current speculation
The real estate industry expects interest rates to go down in 2024, based on hints from the Federal Reserve Bank. The exact timing and amount of the decrease are unknown, but there is speculation that it could be substantial and happen in the first or second quarter. Estimates range from 1% to 2.75% reduction in interest rates.
It's uncertain when this will happen, but most experts agree that when rates go down, house prices will go up.
Why is that?
No surprise, it all comes down to supply and demand. Demand is anticipated to go up (by a lot) and supply will continue to remain very low.
High demand + low supply = higher prices.
With interest rates going up in the past 2 years, a lot of potential buyers delayed their plans. The lower interest rates in 2024 will bring back many of these buyers, causing higher demand than usual. Additionally, some ongoing factors will affect the supply side.
90% of current home owners have a mortgage under 6%.
80% are below 5%.
60% are below 4%
The majority of homeowners are reluctant to sell their current homes due to their low interest rates. This is making many homeowners think about keeping their current home when they buy a new one. A lot of these homes will probably be rented out, especially for homes priced at $600k and below. This will reduce the number of homes available for sale because buyers will take a home off the market without putting a new one up for sale (they will buy a new home without selling their current one). This, combined with slow new construction caused by higher material costs and high interest rates, suggests that the number of homes available for sale will remain very low in 2024.
So what does this mean for you?
If you are thinking of buying - buy soon, before interest rates drop. The logic is this: if you buy before the change in interest rates, you will be able to pay less for the house than after rates drop. Buyers are actually seeing relatively attractive deals right now, which is somewhat unheard of in our market. Yes, your mortgage rate will be higher - for now. Once rates drop you can refinance to the lower rate. But if you wait and home prices go up, you can never reduce the cost of the price you pay for a house.
If you want to buy a house, do it now before interest rates go down. Buying now means you can pay less for the house than if you wait. Right now, there are relatively good deals for buyers which is rare in our market. Although your mortgage rate will be higher initially, you can refinance to a lower rate once rates drop. You can reduce the cost of the mortgage in a matter of months.
Waiting could mean higher home prices and you won't be able to reduce the cost of the house.
According to mortgage expert Christopher Murray, Senior Vice President & Mortgage Banker at Encore Bank, "even at the low end of the projected rate drop, buyers could recover the cost of refinancing in less than a year. Plus there are a number of financial tools to help buyers hold their existing home when they buy." Christopher offers this example: For Denver's average priced home at $700k, with an 80% LTV, at a mortgage rate of 7%, the PI payment would be about $3,725. If rates go down 1% the new payment would be about $3,357 ($368 per month savings). The more the rates drop the more dramatic the savings will be. "With that amount of monthly savings, you would break even in about a year from a refinance. That’s well worth buying now, and refinancing later." Even if you decide to sell your current home before values go up, you will still come out ahead. Missing out on $50,000 of value in your current home's sale price has a lower 'cost' than paying an additional $50,000 for your next home when values go up due to the cost of 30 years of interest on that $50,000.
If you are thinking of selling - ideally wait to sell until after rates have dropped. You'll likely see the value of your home go up after rates drop. Many are anticipating our market to return to homes selling for premiums over list price with multiple competing offers once rates drop.
If you want to sell your current home to buy a new one, it's best to buy the new home first and then sell your existing one. There are many financial tools that can help you do this.
In summary
Based on how all of this is likely to play out, if you want to...
Buy a home - do it ASAP before rates change.
Sell a home - wait until after interest rates drop.
The ideal scenario is buy now and hold your existing home until rates drop. If you want to explore your options, I am always here for you to chat about how you can make the most of this opportunity. There are various financial tools to help make this possible.
But if you need to sell your current home to purchase your next home, you are better off doing so before rates drop (so you don't pay a premium for the next house and have the ability to refinance to a lower rate).
If you're interested in exploring the potential benefits of the upcoming interest rate drop or have any questions, please don't hesitate to reach out to us. I am here to provide personalized advice and guide you through the steps to capitalize on this unique opportunity.
Oh, and here's a new consideration - this message was NOT written using AI.
Notes and further details:
Summary: a lot of details have been summarized for this email. If you'd like to talk through anything in more detail, definitely reach out!
Speculation: note we are saying speculation since the Fed has only indicated intentions and typically does not make absolute statements about future plans.
PI: Principle + Interest payment -- your mortgage payment without any taxes, insurance or other fees.
LTV: Loan To Value ratio - the amount of the purchase price you are financing. The typical scenario is 20% down leaving 80% for the mortgage