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  • Writer's pictureJoseph Gunerman

What Do Interest Rates Over 6% Mean?

The housing market is now dominated by millennials, who represent the largest segment of the population and are nearly all of "home ownership age." For many millennials, they've come to know 2-3% mortgage rates as normal. As rates surge over 6%, and more rate hikes likely on the way, millennial buyers are fleeing the market. All day I hear on the phone "with these crazy rates it just can't be a good time to buy. We're going to wait for rates to come down to normal levels." I'm here to tell you all welcome back to the real normal.

What many don't realize is that mortgage rates were over 6% for most of 2000-2010 and over 5% for much of 2010-2019. The covid rates of 2.5%-3% that we saw were an anomaly, and one that we may not ever see again. So what do rates over 6% mean? Should you leave the market and commit to rentals for the next few years? The good news is that we have a large sample size to look at as we try to predict how the housing market will perform with rates at this level. From 2011-2019, with average rates in the mid 5s, home values in the DMV appreciated at a pretty steady 3-5% yearly rate. Part of this is that inventory levels have remained extremely consistent throughout the last 12 years, much lower than most major markets, due to our scarcity of land and our consistent demand. As a matter of fact, regardless of rates and economic circumstance, the DMV markets have only crossed into the "buyers market" inventory threshold for 3 years in the last 20 - when the mortgage industry caused the housing market to collapse. Our historical data here tells us that in this market, even when rates are "high", demand tends to outpace supply. It also tells us that this demand has high affordability and can compete for houses at prices much higher than the national average.

What we can learn from this is that we have a uniquely stable market in the DC area that tends to favor home appreciation. While it hasn't seen the short term upside of some of the bigger boom/bust markets in California, Texas, and Florida, it also has far less peaks and valleys. Our inventory levels are consistent, and our demand consistently outpaces our supply - regardless of rates. Even today you may see an increasing number of headlines on your social media about home prices collapsing, demand reaching 25 year lows, and a major market correction happening. In the DMV so far this month, with 6-6.3% interest rates, houses are selling at 101.4% of asking price, and our inventory levels remain nearly the same as the last few years.

With all of that said, prices in this area have increased by over 40% in the last two years. If rates continue to be over 6%, I absolutely expect pricing to plateau out and I don't think we'll see much appreciation for the rest of this year and next year. I can see what these rates are doing to buyers' monthly payments and affordability, and I speak with lenders every day who are working on different products and solutions to get rates down into the mid 5s. The lenders and I are in agreement that there's nothing about rates that will cause prices to massively decrease or "crash" unless we start to see layoffs and adverse economic circumstances. Most home owners have rates in the 2s and 3s, and they'll have no problem holding onto their homes until the market stabilizes unless they suddenly lose their income. That means that we'll most likely have more buyers than sellers for some time to come. Rising rates will have nothing to do with an "impending crash" in home prices, and I would encourage anyone hoping for huge price declines to look at greater economic factors instead of the interest rate environment. What does the future of the economy hold? It's difficult to predict and I certainly don't hold the crystal ball!

Is it still a good time to buy? I believe that it is, and I'll leave you all with one thought. As many are fleeing the market, creating less demand and plateauing prices, this could be an opportunity to buy at a favorable price - especially if you intend to hold the house for at least 5 years. The sales price you purchase the property for is permanent, while the interest rate is only temporary. As a buyer, you may be able to buy in now for under asking price, and if rates eventually decrease as inflation comes down, you can always re-finance to a lower rate at a later date. And we know now that when rates come down, prices will certainly escalate, just adding equity to your home. In the DMV market history tells us that we have unique stability, and it's never a bad time to buy as long as you're planning to hold. Want to have a deeper discussion about market dynamics? Reach out to me!

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