Economist, Florida Realtor: Today’s homebuyers are stressed by inflation and rising mortgage rates, leading homebuyers to lower their expectations and find something sooner.
Orlando, FL – The offer-to-close process is one of the most stressful even for seasoned Realtor®s. It seems like just about anything could stop a trade before it hits the final table, be it a credit report issue, an unexpected problem with an inspection.
According to the National Association of Realtors’ 2020 Homebuyer and Seller Profiles, money is one of the biggest issues for homebuyers, especially for 87% of those who finance their home purchases . Those who get loans finance about 88% of their purchases.
Several obstacles stand in the way of buyers who have managed to save their down payments in recent years. Housing stocks plummeted as many people stopped putting their homes on the market, despite a surge in demand from people moving from city centers to the Sun Belt market during the pandemic. As a result, out-of-state buyers continue to outpace local buyers thanks to large cash-outs after selling homes in higher-cost areas.
But this is old news.
A new challenge facing today’s buyers is the rapid economic challenges facing them, including inflation and rising interest rates.
Yesterday’s dollar only stretched to about 92 cents today, making nest eggs worth less than they were a year ago (accounting for about 8% inflation). Inflation also hampers the ability to maintain savings. Because now the same basket of goods costs more than it did a year ago.
Inflation is on the rise, but it is currently at its highest level in 40 years and wage growth is not enough to overcome the impact of more expensive goods and services. For example, instead of putting $500 into a savings account every month, more and more people are investing money they would normally set aside for savings just to cover their increased living expenses.
But even more surprising is the pace of rising mortgage rates.
The Fed has significantly increased the effective federal funds rate over the past few months to combat the effects of inflation. On July 27, the Fed raised the federal funds effective rate by another 0.75 percentage points to 2.33%. The real estate industry is particularly affected by this interest rate fluctuation, as mortgage rates are usually linked.
Everyone had foreseen interest rate increases, but the speed of their rise was relatively unexpected. You may have drastically changed that budget in six months.
Since the Fed rate hikes were expected, many argue that the market has already priced those rate hikes into 30-year fixed-rate mortgages, and interest rates on loans may have peaked. increase. We expect more people to experience more pain after the Federal Reserve (Fed) hinted at more rate hikes this year, and perhaps he for 2023.
In any event, mortgage rates, while still at historically low levels, are well above their five-year average of 3.78% and have risen more than 2 percentage points since January 2022.
Rate increases have certainly been seen before, but never at this pace. .
Fortunately, market forces that could dampen the rapid pace of price increases are weakening. Inventories have also increased recently, so there is hope among buyers that prices will start to soften as more supply will help absorb the wave of still-strong buyer demand.
Still, the current price is over 20% of what it was a year ago. This, coupled with rising interest rates, ultimately reduces the purchasing power of buyers. Especially if you’re a first-time buyer who doesn’t get the benefit of cashing out stocks to increase your down payment.
So what should real estate agents do?
Understand that these factors change faster than the normal market, so discuss them early and often with your buyers. Know how close you are to your margin and if another interest rate move were to drop soon, would you be able to absorb it or would you be kicked out of the game? Get honest about your monthly spending now before you go too far please talk. Can they continue to fully contribute to savings during this time of high costs, or are they starting to plateau?
Finally, ask them to reaffirm their expectations. Perhaps it’s time to consider a different zip code or property type.
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The steps to owning a home may look a little different than they did a year ago, but there are still steps to take. Overcoming obstacles and bringing clients home may require a little more creativity.
Jennifer Warner is an economist and director of economic development.
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