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Will Higher Mortgage Rates Cause Inventory Levels to Get Back to Normal?

By Realty Times

The reports seem conflicting. On one hand, you have experts saying the real estate market is cooling down and going back to normal.

On the other hand, you have experts pointing out the high cost of real estate and low inventory that we’re still experiencing nationwide.

So, which is true? Well, both are… at the same time. Let me break it down.

Mortgage Rates

In 2021, the average rate was 2.65%, according to Business Insider. On Friday, June 03, 2022, the national average 30-year fixed mortgage APR is 5.400%.

The Mortgage Reports predict that number will continue to grow in 2022. Experts interviewed anticipate that the 30-year fixed mortgage rate could land between 4.8% and 7.0 percent. For the 15-year fixed mortgage rate, their predictions fall between 3.9% and 6.0 percent. That’s a potential increase of 4.35% in the span of one year!

How does this affect inventory and home sales? 

Real Estate Inventory

While home prices continue to rise, the increase in mortgage rates hasn’t solved the lack of inventory problems buyers still face. 

Time.com suggests things will go back to “normal” by the end of 2022… and things are slowly moving there now. Slowly. Very slowly.

“Three months ago we were at less than a million homes in inventory nationwide,” said Dawn Pfaff, president of My State MLS. “During normal times there are about two million homes for sale. Now, inventory is coming back. Folks are panicking thinking they may have missed the peak of the market, and interest rates are rising, so sellers are more willing to put their home up for sale.” 

In 2021, we saw double-digit increases in home prices. This year, it may just be single-digit increases. Bidding wars won’t be as intense or as frequent, but yes, they may still happen. So, it’ll still be a great market for sellers.

But what about buyers?

Cash Buyers

Not only do buyers have a higher mortgage rate to pay, but they will still face competition from all those cash buyers we’ve seen lately. While you may think higher mortgage rates don’t impact buyers paying in all cash, the author of this Forbes article states otherwise.

Many cash buyers are companies buying to flip or rent out the houses to get a return on their cash investment, or they’re companies facilitating transactions for people who will eventually finance their sales but need the cash to make the deal happen. Nationwide, many individuals who are cash buyers eventually get a traditional mortgage.

Senior contributor Bill Conerly reports cash buyers to react similarly to buyers who get a mortgage because their cash can be tied up in stocks and bonds. Those interest rates move up and down as mortgage rates do.

In places like Florida and Texas, many cash buyers are migrating from high-price states like New York and California. They are selling their home at the relative peak of those markets and buying lower-cost properties in the sunbelt. In those cases, based on home prices alone, mortgage rates have little impact on these buyers.

The negative effect of higher interest rates usually does not cause home prices to fall, just to grow at a slower rate.

“When mortgage rates rise, monthly payments go up and some would-be borrowers no longer qualify for a loan,” Conerly writes. “Companies face a similar constraint from the bond market, but they usually are not skirting the very edge of qualification.”

Timing

There is no doubt it’s a seller’s market, so if you’re looking to sell your home, the time is now. Like, right NOW.

“It’s still a seller’s market because the demand remains high in most areas of the country,” said Pfaff. “As long as demand stays where it is and a home is priced correctly, that home will still sell at an accelerated pace.”

If you’re interested in buying, you can still find a good deal. Remember, outside of traditional listings on a local MLS, you can also find great deals on short sales and foreclosures.