It's not surprising that interest rates are starting to rise. We just haven't seen significant increases in a while because of a little event that happened around 2008.
But now, since the start of 2018, the average rate for 30-year fixed rate mortgages has climbed 50 basis points (that's 0.5% in finance parlance). It looks like sub 4% rates are a thing of the past. Sub 5% rates might soon be a thing of the past.
If mortgage rates continue to rise, which seems fairly likely, then affordability is going to further erode. And, this is happening during a serious housing shortage all around the Portland area.
What does it all mean for prospective buyers and sellers?
The good thing is that, so far, rising rates haven't fazed home buyers. This article explores how home buyers are, for the most part, collectively shrugging at rising rates. That same article does point out that rising rates might be affecting sellers. But, let's face it, in Portland sellers are already wary of trying to sell their home and find another one because inventory is so low (definitely read on if you're in this boat).
Which leads us to a situation that turns conventional wisdom on it's head.
Conventional wisdom states that rising interest rates = a reduction in home sales.
And yet, that's not what's happening. In this article from the Oregonian, they note that home sales have spiked despite the rising rates (although take this with a grain of salt, homes closing now were under contract with rates locked around 1-2 months ago). But, I can tell you from my experiences that it's still not slowing down. If anything the frenzy is worse as we head deeper into spring.
(I also don't like basing big financial decisions on "conventional wisdom", which rarely holds true upon close scrutiny. Historically, rising interest rates don't necessarily trigger a decrease in home sales or a decrease in home prices. But, digging further into that is a whole other blog article that I'll save for future...!)
Our continuing inventory problem in the Portland metro area means that the rate increases we've seen so far are spurring buyers into getting serious fast, before rates rise further and values push even higher. This, combined with sellers reluctant to give up their low rates and move onto their next home, is going to make spring and summer in 2018 one of the most competitive ever.
Take a look at this article for a quick synopsis of how rising interest rates erode buying power.
What does this mean for you?
If you're a buyer, should you join the fray and find a home now? Or, wait until things calm down and a more normal cycle re-establishes itself (whatever "normal" means)?
If you're a seller, how does this impact your plans?
Let's break down the pros and cons for both buyers and sellers.
Buyers - Reasons to pull the trigger now
- Rates have risen and may very well continue to rise. Do your research, but you'll probably find that few people are predicting rates to go back near 4% anytime in the foreseeable future. The Fed has made it pretty clear that they will continue with quantitative "un-easing". This means less cash in the market which pushes up long-term bond yields, causing mortgage rates to rise.
- Prices in Portland continue to rise, albeit a little slower than they were a couple years ago. There are several reasons for this. A couple of them: lack of inventory means only so many home sales can happen, which slows down the rise in prices. Also, double digit price increases can only be sustained for so long. This article from Forbes includes a map of each state and expected price changes for 2018. They predict Oregon will increase by 3.8%, but Portland will likely outpace the state as a whole, so don't expect price increases to be anywhere near that low for the metro area.
- Inventory is still ridiculously low, with no concrete indications of it loosening anytime soon. Our current inventory for the Portland metro area is 1.9 months, well under the ~6 months of inventory needed for a balanced market. Low inventory and high demand (lots of first-time home buyers, investors, and people moving into Oregon) makes it extremely difficult for prices to do anything but continue going up this year.
- The economy is, for the most part, looked at as being healthy right now. Price dips generally don't happen in a good economy. Read my blog article "When Are House Prices in Portland Going to Go Down" for some insight.
- Rising prices, rising rates, and continued low inventory mean that if you can buy now, it makes sense to do so before our inventory problem forces prices even higher and increasing interest rates erode your buying power.
Buyers - Reasons to hit the pause button
- The Portland metro area has been particularly hot. Some might even say over-valued. (This article certainly thinks it might be.)
- A more normal ebb and flow cycle will very likely re-establish itself at some point. However, that could be in 6 months, or it could be a decade or more down the road. Take a look at this chart, which factors out inflation, so that you can see the reality of home prices over a 116 year period. (If inflation weren't factored out, then it would look like home prices ALWAYS go up, even during the Great Depression and World War 2. Amazing how one piece of data can skew the thinking of an entire nation!)
- Value dips definitely occur in the housing market. As you can see in the chart I linked above, historically, price dips are fairly short-lived and followed by subsequent rises that overtake the previous high point. (Obviously with the 2008 recession being a major exception.)
- As rates go up, other investment vehicles become more attractive. Eventually savings accounts will start offering decent returns again! Not that we're anywhere close to that yet.
- If you are primarily thinking about buying for short-term investment purposes, then this might not be the best time for you.
- We've been in a low inventory market in Portland for over 4 years. It won't last forever.
There is no crystal ball. We know rates are going up and inventory is still very low. If you plan to purchase a home and stay there for at least a few years, then I don't see much of a reason to hold off from buying. It could be years before home prices level off and/or dip, and by then rates will likely be much higher than they are now.
If you wait to buy, then you'll miss out on years of gaining home equity through home values rising and paying down your mortgage. And, rates are still so incredibly low from a historical standpoint! Take advantage of them while you can.
Sellers - Reasons to pull the trigger now
- Selling a home is less dependent on the market and more driven by personal factors (even, to some extent, for investors). If you're going through a life event that makes selling your home the right thing to do, now is certainly a good time to do it!
- For those considering selling so that they can "move-up" (buy a larger and/or more expensive home), then you should do so now before rates rise further and erode your buying power. Here's that article again about how mortgage rates affect purchase power.
- "Move-up" buyers should also be concerned with rising home values. While you are continuing to gain equity in your current home, the homes you are considering are also gaining equity, and if it's a similar area, their equity gains are bigger than yours from a dollar standpoint. Sooner is definitely better than later for you!
- For those considering selling so that they can "downsize", then you've got a little more flexibility. You should also be concerned with rising rates, but you're gaining more equity in your home than the ones you'll be looking at (if it's a similar area). You can afford to take a little more time. But, don't wait too long or the rising rates will erode your equity gains.
- The kind of price increases we've seen over the past few years aren't going to continue. Already, the Portland metro area has slowed down a bit. The year-over-year average price increase in February, 2018 was 7.9% in the Portland metro area. This is great! But, it's certainly less than the double-digit numbers we were seeing in the years prior. This is the perfect time to take advantage of the seller's market before things start to level off down the road.
Sellers - Reasons to hit the pause button
- If it's just not the right time for you to make a move from a personal standpoint, then don't. You'll continue gaining equity in your current home and the market will still be here when you're ready. Sure, rates will likely be higher if you're planning on selling AND buying, but be assured, regardless of where rates are, people will still be looking to buy and sell homes.
- The big reason that many sellers are holding off on listing their home is that they are worried about being able to find a replacement property. Low inventory and lots of multiple-offer situations make it difficult to sell a home while simultaneously trying to buy one. However, it can be done when you have a savvy Realtor, and depending on the area and price range you're looking at, it might not be as difficult as you think.
- However, it might be JUST as difficult as you think to buy and sell at the same time. The best thing to do would be to contact me. We can discuss your current situation, your goals, and see what the most effective strategy would be. Even if that strategy is to hold tight for a while.
- We clearly haven't hit a peak yet when it comes to home prices. If you're looking to try to sell your home closer to the top of the market, then it's pretty clear that we're not there yet. At the same time, no one has a crystal ball on this. A sudden economic event can very quickly change everything. Don't wait until we hit the peak, because by then it will be too late.
Now is a great time to be a seller in the Portland metro area if you're ready. While it's trickier if you also intend to buy in the Portland metro area, it absolutely can be done. And it's smart to look at doing so now before rates rise higher and prices continue to increase.
Disclaimer because this is a tricky subject!
As always, all opinions are my own and predicting the future is impossible. As a real estate professional with a science degree, I use a combination of my experiences and the available current and historical data to write articles like this one.
The world of real estate is fascinating because it involves so many different areas of expertise. I welcome your thoughts, opinions, and any additional information you'd like to reference on this subject.
For more information about mortgages, talk to a home loan professional to learn about interest rates and loan programs.
Contact me if you need a referral to a few good local lenders, contractors, or other related industry professionals.
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