by Debbie Yost, CNE, CIAS, CDPE, CLHMS, CRS, CPC, GRI
With recent interest rate increases many of our clients have been asking, “Will this cause home prices to drop?” Unfortunately, my crystal ball is not clear enough to confidently answer that question. What I can do is provide some information to explain how increasing interest rates impact homebuyers and what you may expect in the future if you are considering selling.
- Mortgages are more expensive. Mortgage interest rates have risen about 2% since January, which has reduced buyers’ purchasing power by about 20%. Some buyers may be priced out of the market as interest rates are expected to continue to increase further this year. Some may choose to sit out, hoping that home prices will eventually fall. Many will choose to buy now but buy a smaller or less expensive home.
- Rents will continue to increase. As some homebuyers choose to exit the market and rent instead, rental demand will increase and rental rates will increase as well. Rental rates have already risen dramatically in our area and this is not expected to change. Pinal Central reported on our fast growing area in its May 26, 2022 article: “The U.S. Census Bureau on Thursday released its findings on the fastest-growing communities in the nation based on the data it collected in 2021. It found that among cities and towns with a population of 50,000 or more, Casa Grande grew at the seventh-fastest rate between 2020 and 2021, and its neighbor Maricopa was just behind in the eighth position.”
- Limited supply of homes. The nation is still short four million housing units as a result of limited homebuilding in the past ten years. There is less than a two month supply of available homes for sale on average across the nation, with even less in the Casa Grande Valley. Traditionally a four to six month supply of homes is considered a balanced market. The Covid pandemic increased the value of a home as more than a place to sleep or a financial investment. Homes have become a refuge, a place to work remotely, a place where children may learn virtually. Homes have become more valuable to their owners and many living in high priced metro areas continue to relocate to areas with great year round weather and space for outdoor living instead of being crammed into a high priced, small apartment. Supply and demand always impacts sales prices.
- “Bubbles” are what children blow out of small containers. The factors that led to the mortgage meltdown and the great recession were a result of irresponsible lending practices. Since those early 2000’s lending standards and appraisal guidelines are significantly different.
The dramatically rising home prices of the past few years are based on the basic concept of supply and demand. The economic growth we are experiencing in the southwest and central Arizona will continue to bring more people to our beautiful area. Some hopeful home purchasers will be priced out of the market and will be forced to rent. Financing options always adjust based on market conditions. If buying a home now is a good choice for your particular situation, there is usually a financing program available to ensure your purchase is a wise economic investment. Keep in mind that interest rates are not “forever rates.” You may “buy” a home but you are simply “renting” a mortgage interest rate. Interest rates fluctuate and when rates drop, refinancing is always an option.
Consumer confidence plays a major role in supply and demand so remember to breathe deeply when you hear self-proclaimed experts make unsubstantiated predictions without basing them on verifiable data. As Lawrence Yun, NAR Chief Economist commented on June 15th, “Pricing a listed home properly will, therefore, be the key to attracting buyers. In the meantime, rental demand will strengthen along with rents. Only when consumer price inflation tops out and starts to fall will mortgage rates stabilize or even decline a bit. That is why providing additional oil supplies will be critical in containing consumer prices and interest rates.” All the evidence we see as a result of our 40+ years here in the Casa Grande real estate market is that home values will continue to appreciate (albeit more slowly) as long as supply remains this low. This is good news for you if you are considering selling.
If you are curious about what your home could sell for in the current market, we invite you to check out this home value calculator, which takes recent sales into account. This is a computer-generated market value and individual factors such as condition, and recent upgrades and improvements need to be considered after a physical visit from a local, experienced Realtor finetuning the numbers.
If you have any questions about whether buying or selling now is right for you, or the real estate market in general, please reach out via phone or email. We are always happy to chat about the market and look forward to hearing from you.