Home purchasing

The purchasing power of buyers has fallen by 25% as interest rates rise

After two years of living in the basement, interest rate skyrocketed in the first part of 2022 and show no signs of stopping anytime soon. The implications for real estate have been fierce.

The Federal Reserve (the Fed) is the main culprit for the sudden rate jump. His fight against high inflation prompted Fed members to raise their benchmark rate and end their mortgage-backed bond purchase program that had kept mortgage rates artificially low during the 2020 recession. and pandemic response.

Today, when mortgage money used to be plentiful, potential buyers have nothing to do.

The photo above is the first tuesday Adjusted Buyer Purchasing Power Index to show the change from when fixed rate mortgage (FRM) rates were at an all-time low in December 2020.

In April 2022, the average 30-year FRM rate increased such that the amount of mortgage money available to a typical homebuyer fell nearly 25% from December 2020. Homebuyers are today at a huge disadvantage today compared to those who bought just a year ago.

For example, a typical person who qualified to buy a home with a maximum mortgage of $500,000 in December 2020 is now only eligible for a maximum of $375,000. During the same period, house prices also rose rapidly. Since December 2020, low-tier home prices in California have risen an average of 23%, with mid-tier prices up 28% and upper-tier prices up 31%. This double whammy has left mortgage buyers unable to compete.

The rapid and dramatic reduction in available mortgage capital has prompted homebuyers to:

  • get out of the market (a sound financial decision);
  • settle for a smaller/lower quality but cheaper home (a surefire way to catch buyer’s remorse); and
  • offer less money for the same standard of house (unlikely to work in today’s ever-competitive market – but wait a few months and sellers will soon be keen to accept lower offers).

Together, these actions result in reduced demand for high-priced properties – and while the slowdown in house prices is not yet noticeable in mid-2022, the downside is imminent.

Related article:

The average price trend line: the anchor of house prices

House prices in the coming recession market

Historically, when the Fed begins to systematically raise its benchmark interest rate, a recession occurs 18 to 36 months later.

So even though the 2020 job losses are not yet fully recovered, the economy is heading into a second recession, which first tuesday should arrive in the second half of 2023.

Already, the sense of economic dread is reverberating through the average consumer and the end-user home buyer and seller. Along with the rise in consumer prices, it is hard to ignore the news of the falling stock market and the obvious escalation in interest rates.

The result will be fewer homebuyers interested in buying than what they rightly estimate to be the top of the market.

As home buyers retreat quickly, sellers will be eager to toss their investment aside like a hot potato and accept more and more falling house prices. As prices drop, recent buyers will soon find themselves underwater, weighed down by negative equity. Unable to complete a traditional sale, some of these homes will head for foreclosure and become owned real estate (REO).

How will real estate professionals fare in the coming recession?

Real estate agents who wish to continue to earn a decent living in the years to come, prepare now by becoming a:

  • brokerexpanding their income stream by opening their own brokerage or even simply increasing their fee allocation within their current brokerage;
  • REO specialistbuild relationships with key players in the REO industry;
  • real estate syndicaterallying investors to take advantage of the coming decline in property prices;
  • building manager, a recession-proof career; or
  • specialist of vendor financingalso known as deferral financing, which will undoubtedly become more popular as interest rates continue to rise.

The housing market will only stabilize after 2025, with buyer-occupiers, speculators and long-term property investors returning in greater numbers from 2026-2027.

Related article:

How to prepare for the REO resurgence