How the Fed Rate Hike may Affect Anaheim Hills and Orange County Housing
If you are aware, back in December 2021, or the fall of 2021, interest rates were hovering near 3%, or three and a quarter percent today, as of April 20, 2022, rates are very close to 5%. And if it’s a jumbo rate, that’s it’s more than 5% for a fixed rate. So the rates have gone up significantly, I guess they’re doing this, the feds are doing this to control the inflation, which is pretty high cost almost 8%, which is very high in the last 30 to 40 years.
How will this affect the home purchases not only for you as a home seller, or for you as a home buyer, but overall in Orange County or Anaheim Hills, or pretty much in all of California?
The best way to show you how the interest rate affects home buyers and home sellers is to give an example let’s say an item hills, the median home sales price is a million dollars. So let’s take an example of a million-dollar home. If you’re a buyer, and you’re going to buy a house with a 20% down on a million-dollar house, and let’s say last year when the rates were 2.5% early in 2021 at 2.5%. When you buy a million-dollar home your principal interest tax and insurance what we call the PIT was approximately $4,178 monthly payment come back today April 2022. The same house is a million dollars putting 20% down which is $200 Same downpayment you are putting back then, but now the rates are 5%. Do you know what the payments are? Well, for the same house same downpayment, the payments are almost $5,200. So with a 5% interest rate on the same house, your payment comes out to 5312 a month. But remember, at 2.5% the payment was $4,178 per month, same house, same down payment. And that’s almost a difference of $1,200 a month, which is a lot of money when it comes to the same home at the same price and you’re paying $1,200 or more. So the big factor about the rates going up is what we call the affordability factor. So what’s happening right now is a lot of the buyers who could afford a million-dollar house back in 2021.
Spring and Summer cannot afford that million-dollar house today, because the rates went up. So the affordability factor went down. So for the same buyer now instead of buying a million-dollar house, he or she can only buy a $900,000 house or 850 house. So the payments are coming out at 4178. So this will affect the demand. In fact, as of April 2022, we have seen from the reports coming out from the multiple listing service and market trends reports, we have seen that there’s a sign I wouldn’t say significant but there’s a big difference between the homes that went into pending in 2022 April when we compare that to homes when pending in April 2021. So there is a slight slowdown that we are seeing because of the interest rate. So if you’re a buyer, you can buy a lesser house or you buy the same house for bigger payments. And if you’re a seller, the buyers are going to rethink about buying your house, which is a million dollars assuming it’s for sale for $4 million, they may buy something smaller. So your pool of buyers is becoming smaller as we go along. So what happens is as the affordability factor goes down, so when the demand goes down, which is the number of homes going into escrow when that slows down, that affects the time it takes to sell a house. So when the interest rates go up, affordability goes down pendings go down, so it takes longer to sell a house. And this affects not only the buyers but also the seller.
How does it affect the seller?
If you’re a seller, and if somebody is going to think about buying your house, maybe he cannot afford your home so it’s going to take you longer to sell a house. So you may have to wait longer and you can not get the price increase that you are getting last year or the last three or four or five years. When your neighbor sold for a million dollars. Sellers immediately wanted $50,000 – $60,000 – $100,000 more because the next-door neighbor sold for millions and of course your carpet is better than your neighbor’s carpet so the prices went up not anymore. You have to be very careful now when you list your home you have to be very competitive. As the demand is going down. It’s going to take longer to sell and the other factor that’s going to happen as we go along and of course, this is a prediction and trend we are going to see how we are no longer going to see that ridiculous price rise that we had seen before. So just because your neighbor sold for a million dollars you cannot sell for $1.1M. You may have to just list for a million dollars. Not only that, but on the offers that we were getting from the buyers, the sellers were demanding that appraisal should not be an issue. So if the house appraised at $950, and the body to $4 million, the buyers had to dish out the $50,000 was extra. So that’s going to go away a lot of sellers said to buy the house as it is, we’re not going to fix anything that may go away. That means if there is a dishwasher leaking, or something’s not working, you may have to fix that to satisfy the buyer. And a lot of those sellers were demanding to stay 30 days, 60 days for free. So there’s a significant change in the market coming all because of the interest rate. And like they say, in real estate, the interest rate is a time bomb. So rates are going up. And that’s going to slow the housing market. We saw that. And by the way, I’m not trying to scare you. And saying that doom and gloom are coming. I’m just giving you the facts. What happens when rates go up, affects the housing market. And of course, in the last 10 years, we have seen the prices go up for the last 10 years from 2011-to 2012. Prices have gone up significantly, which has never happened in the history of real estate. As far as I know, they’ve gone up 5,6,7 years and they stop this time the cycle has been 10 to 11 years. So like they say whatever goes up comes down. That’s true in real estate prices have going prices have gone up and up and up and up and it’s coming down which is okay, which is normal, which is cyclic, it happens. Same thing with interest rates. They’ve gone down and down and down and down. 2.2% Fixed rate. So now they’re gonna come up. This is just a cyclic normal real estate cycle. So one of the other things I wanted to suggest to you is that even though the rates are going up and things are slowing down. I’m not trying to be negative if I sound negative. Even though the demand is slowing down, prices may go down. You may have to sell it at your appraised value. You may have to do repairs, it may take longer to sell. One thing’s for sure, not for sure. But one thing that we predict or that I see is that we’re not going to have the housing crash that people are talking about. I don’t see based on the reports based on talking to other people. We don’t see a housing bubble, things are slowing down. That’s normal, but more homes will come on the market. All the sellers that were in COVID that are not selling are going to start selling so we should see an increase in inventory. The other thing is a lot of the sellers have a lot of equity. So even if they lose jobs or lose business and all that they can still sell their home and have money coming out of the house when they sell the home because of the equity so we don’t see the housing crash in the near future unless something very radical happens outside of the real estate control.