According to Realtor.com, existing home sales dropped 5.9% in October. This is after a red-hot market during the Covid lockdowns which saw millions of home-buyers flock to the suburbs for more living space. With the continuing trend towards work-from-home for many in the jobs market, what is driving the decline in sales, and what could it mean for the future prospective home buyer?
Mortgage rates have increased dramatically in the past year. With inflation at record highs, the Federal Reserve (which sets interest rates) has been trying to tame inflation by increasing the cost of borrowing money (raising interest rates). Combined with the recent spike in home prices, the interest rate hikes have created a ‘double-whammy’ for many prospective home buyers, since not only are they trying to purchase more expensive homes, but due to the increased interest rates, their money doesn’t go as far.
As detailed in a prior article on TheSavingsHound, the interest rate you pay on a home-loan can have a very dramatic effect on not only your total interest paid on that loan, but also your monthly payment. With financing $250,000, at today’s interest rate of 7.4% your monthly payment would be in excess of $1,700, compared to financing the same amount at 2.7% (the average interest rate in 2020) would be around $1,030. Thats a whopping 60% increase in your monthly payment for financing the exact same amount of money!
Quite simply, this prices a lot of people out of being able to afford a home. So whats next? Some experts expect the housing market to continue to decline until mortgage rates come back down, or there is a significant drop in home prices, however with many people locked in at the historic low interest rates of 2020, many current home owners are hesitant to sell knowing they would be forced to finance their next purchase at today’s higher rates. This creates a bit of an inventory shortage, which could prop up home prices for the foreseeable future.