What Will Happen When Interest Rates Fall?
Here’s How We Believe the Housing Market Will Respond
For those that are in the market - as well as some of those on the sideline - the question that most would like answered is: What will happen when interest rates fall?
Will home prices shoot up? Will they go down? Stay the same?
People have questions, and we have answers.
Here’s how we believe the housing market will respond when interest rates subside over the coming months.
First: Demand Will Rise
When interest rates tripled over night, most thought that home prices would plummet. However, this wasn’t the case.
Home prices in select markets - such as San Francisco, Los Angeles, and New York City - took a slight hit, but remained fairly strong.
And similar to the subtle dip that was caused by a rise in rates, we foresee there will be a moderate bump in prices when rates drop again. But the more immediate change will be seen in mortgage application volume. Those that previously paused their home search, will pick up where they left off.
Second: Home Prices Will Follow
Once demand begins to exceed inventory, the market will swing back towards the favor of sellers.
While the average interest rate tied to a 30-year fixed mortgage hovered around 2.75% - an all-time historical low - a wave of home-shoppers flooded the market. It wasn’t uncommon for sellers to receive multiple, above ask offers within hours of listing their home.
But when mortgage rates rose to nearly 8%, housing affordability tanked, the vast majority of buyers exited the scene, and sellers were left high and dry.
However, with the pendulum swinging back towards a lower interest rate environment, buyer demand will return. As a result, sellers will once again be able to ask top-dollar for their properties. And although it will take time to materialize, higher listing prices will eventually become higher sale prices.
Third: An Increase In Listings Will Come Last
Once demand peaks and home prices rise, more sellers will begin bringing their homes to market; hoping to secure the offer they’ve been waiting for.
However, even with the added listings, there still won’t be enough to go around. Buyers will outnumber the available listings due to the severe shortage of inventory, and sellers will remain in the driver seat.
What Does All of This Mean for Buyers
Although it sounds as if things will go from ‘bad’ to ‘worse’ for buyers, we do believe that there will be a ton of opportunity that arises throughout the market in the coming months.
With interest rates where they are currently, most buyers are forced to either:
A. Find deals in which the seller is willing to negotiate on the terms of the purchase (often times rare)
B. Explore non-traditional financing, such as private money loans and ARMs (Adjustable Rate Mortgages)
C. Come up with a substantial downpayment in order to keep their mortgage within reason
All of which make it that much more difficult to find a purchasing opportunity that checks off all of your ‘buy boxes’. But if you’re willing take on a property that needs a bit of TLC, you’ll find that there is far less competition to beat out, and you can be a lot more aggressive in your offer and negotiations.
Granted, fixer-uppers typically require much more due diligence and sweat equity, but in most scenarios, the pro’s far outweigh the cons.
In summary, home prices will lag behind buyer demand. Prior to there being a material shift in both listing and home sale prices, there will first be an influx of buyers that enter the market. The number of offers submitted to each listing will increase, and in an effort to seal the deal, buyers will gradually begin to push up their offer prices and pull back on contingencies.
The competition amongst buyers, will allow sellers to gradually begin asking for more as they bring their homes to market. Once, this stage is set, more sellers will pour into the market from all directions.
This is a golden opportunity for first-time homebuyers that have saved up a sizable downpayment, as well as experienced purchasers and investors who are looking to take advantage of a slower, less competitive housing market.
For additional insight, guidance or assistance with your next sale or purchase, please feel free to reach out.
Our team is more than happy to help.