It is widely accepted in the Real Estate and lending fields that home buyers don’t make a buying decision based on the price of the home or the rate on the loan. “They buy the monthly house payment”. That payment is influenced by the price of the home as well as the rate on the loan, but the weight of each can be significantly different.
If we look at the last housing boom and bust, we can see that at the boom cycle, prices spiked out of control for a few years (32% in some areas in Orange County in one year!!). this happened because the creative mortgage products at the time made it possible to get ridiculously low payments and down payment requirements were pretty much tossed out the window. So you could buy a half million dollar house with no down payment and no closing costs, and get in with a monthly payment that was cheaper than rent some times. Who would turn that down? Hence the mad buying frenzy of the time.
Naturally, when those low introductory mortgage rates reset 12-24 months later.. payments doubled or more in many cases, and the “house of cards” collapsed. The amount of the loan the borrower owed was still the same, the price of the home probably about the same.. but the payment wildly different and clearly unaffordable under the new terms.
If we look at today’s rates, end of summer 2014, rates are near historic lows again. As much as the phrase has been overused, the reality is.. rates are crazy low right now again, and have not moved much over the past twelve months. Home prices on the other hand, skyrocketed by double digits in 2013 again, and are just now beginning to slow down.
According to S&P Case-Shiller Indices, for the first time in six years, home prices saw smaller annual increases in June across all 20 housing markets that make up the index.
Here in Southern California, we are seeing a lot more price reductions than we had in years. Double digit appreciation seems to be a thing of the past and the multiple offer environment is slowly fading. As we enter into the fall season, first time home buyers typically become very active at this time of the year. It will be a different environment for them and for sellers who were not able to sell their homes over the summer.
We are also noticing hypersensitivity to rate fluctuations. Home buyers ready to walk away from a contract because a rate change of .125%. Only after explaining to the buyer the minimal impact that such a small change has on the payment, can they be comforted again and their fear of not being able to afford the home mitigated.
Rates have actually eased a little these past couple of weeks as the yield on the 10 year T-Bill has been sliding. Mortgage rates loosely follow that yield but are also influenced by other forces on the mortgage securities market. We have not seen the rates break the 4% psychological barrier though, if rates did come down, that would definitely kick things up again in the housing market.
The fall season is just ahead, end of the year not too much further ahead and winter/holiday season will be here before you know it. 2015 is going to be a very different market for Real Estate.