The South Bay real estate market is changing. And although it’s not reflected in the statistics yet, I will tell you anecdotally that there is a shift in the winds. Due to rising interest rates, many buyers are suffering from sticker shock; they are getting priced out of the market or are coming to terms with their stunted buying power. Other buyers are pulling back and plan to wait for rates to come back down again. All in all, it creates a buyer pool that is no longer rushing from property to property making outlandish offers. In fact, now price reductions are becoming more common place and some properties are sitting on the market longer. Don’t get me wrong there are still homes that sell quickly with multiple offers; we are just seeing a glimmer of a more balanced market.
What’s Next for Interest Rates for Real Estate
At this point in time, I don’t believe interest rates will come down this year. Keep in mind, rates will never go up (or down) in a smooth line. They zig zag. So rates go up, then they dip a little, and then they go up again and so on and so forth. It’s also possible if rates get high enough this year, that if they do come down next year, they could end up right where we are now, in the 4% range for jumbo loans and the 5-6% range for conforming loans.
It’s important for buyers to remember:
- Rates are still relatively low.
- The rates of 2% and 3% were artificially created by the FED to spur the economy
- Current inflation makes it unlikely that the FED will put downward pressure on rates in the near future.
- Buyers should focus less on rates and more on their monthly budgets.
For sellers, it’s more important than ever:
- To have the right marketing strategy and adjust expectations.
- Properties will take longer to sell.
- A frenzy of offers is less likely; one or two offers is becoming commonplace again.
Will Higher Rates Lead to a Market Crash?
To wrap up… everyone wants to know if there is a market crash ahead. If you listen to the CEOs of the major banks, they are all talking about rough economic times and market volatility for the foreseeable future. If we are indeed now or soon to be in a recession, our local real estate market is somewhat insulated in the short term. Most homeowners are locked into low 30 year fixed rates; they should be able to ride out an economic storm. And if homeowners have to sell, they have plenty of equity, minimizing the fire sale mentality. However, if a recession hits hard and there are long term job losses, then we could have a different scenario.
For the long term, it will be important to keep an eye on:
1. Consumer credit lines. If inflation continues to rage, and more people lose jobs, we could see consumers depend more heavily on credit. If they start to default on their credit card payments with interest rates upwards of 20% (let’s face it — this is what high interest rates look like), this could bleed into the housing market and cause a downturn.
2. The jobs market. Rising unemployment will negatively impact the real estate market. But it could also help temper the FED’s rate hikes.
3. Lastly, keep an eye on the financial health of the banking industry. The housing market typically crashes when financing dries up.
Otherwise, at least for the next few months, I think we will continue to see the market move along in a similar pattern, settling into a more balanced market between buyers and sellers.