Florida Realtors economist: Interest rates have an oversized impact on buyers’ ability to secure a home – and the challenge is growing.
ORLANDO, Fla – Sale price and interest rate are the two things locked down when financing the purchase of a home. This one number dictates how much an individual shells out each month for their mortgage payment – and for most households, this number is far and away the largest share of their monthly expenses. It matters more than most other line items on the household spreadsheet as it directly impacts their ability to pay for other things and is often a driving force behind where a family chooses to live.
We know that the median sales price for single-family homes has been increasing at a quick clip over the past few years. We also knew that interest rate increases were bound to happen. Keeping rates artificially low was never to be a long-term recovery strategy from the COVID recession.
However, the pace of those increases has been nothing short of breathtaking. Couple that with sales prices hovering near this cycle’s peak and we have the makings for trouble.
June 2022 appears to be the cycle peak, with the median sales price for a single-family home coming in at $420,000. The cost to service that debt with interest rates just below 6% was $1,851. In that peak month, the sales price had increased by 33% from the same month two years before – but the monthly payment increase was 47%.
The enhanced purchasing power of buyers, both first-time and existing homeowners, has eroded. The low interest rates that allowed people to stomach increases in sales prices has evaporated. We’re now left with high (relative to 18 months ago) rates and high sales prices.
Of course, this is all for new mortgages. People locked in at low rates are positioned well to weather this storm. However, the prospect of entering a higher interest-rate environment may keep current homeowners from selling, potentially further pinching already low inventory. First-time home buyers are particularly impacted by this current moment in the cycle, as historically high sales prices with relatively high interest rates makes that all-important number on the household spreadsheet too high to make the rest of their obligations balance out.
How did we get here?
When interest rates are low, a buyer can afford to pay a higher sales price because the monthly payment to service that debt offsets the increased price; more of the payment goes toward principle and less toward interest. This simple equation helped propel an already healthy market into a frothy one since May 2020. Debt became so cheap that buyers didn’t mind paying a higher sticker price – the monthly payment was still palatable and didn’t upset their household budget.
In June 2020, three months after lockdown started, the median sales price for a single-family home in the state of Florida was $282,000. Interest rates were hovering around 3%, about 150 basis points (1.5 percentage points) lower than they had been the same time a year before. The estimated monthly payment at that sale price and interest rate was about $980. This monthly payment was well within reach for most Floridians, as only the highest cost areas like South Florida and a few counties in the Panhandle had prices that exceeded the median income needed to qualify for a mortgage. This compelled more people, including first-time homebuyers, to enter the market and lock in rates that enhanced their purchasing power. People itching to upgrade did so as well, often getting into pricier homes bolstered by a sudden increase in equity from their existing homes.
The impact of the low interest rate environment was prolonged and significant. In March 2021, we published an article, The Invisible Stimulus Package: Homeowners Who Refinance, that showed how low interest rates were akin to an invisible stimulus package to homeowners who refinanced at lower rates. Interest rates remained low for about two years, unleashing a game of musical chairs in the housing market that we haven’t quite seen before. Migration of people from other states flush with cash-out equity further pushed the market to beyond historic norms.
The result – sky high sales prices. Sticker price was getting out of control, but monthly payments were able to somewhat withstand these steady increases.
In June 2021, the median sales price increased year-over-year by 19.7% to $351,000, but the monthly payment was $1,178, or a 16.8% year over year increase. The still-low interest rate helped keep the overall cost of a home within the realm of reason for the typical household budget.
We all know that interest rate fluctuations are important to anyone in the process of qualifying for, and ultimately purchasing, a home. Typically, a potential buyer can expect some moderate swings as the market fluctuates week to week. Rarely, however, are these swings so wild that a person’s monthly payment would change from “affordable” when they pre-qualify to “no longer qualified” by the time they get to the closing table. It’s not the level that we’re at that is causing pain – it’s how fast we got here that’s become so disruptive.
While the residential real estate market is particularly vulnerable to interest rates, it is also the roof over a person’s head and not an asset that people try to time with market cycles. People will transact, and the fundamentals underpinning deals do not resemble anything like what we saw running up to 2008. Just understanding the environment we’re in will help brace you for the impact of a potentially not-so-soft landing.
Jennifer Warner is a Florida Realtors economist and Director of Economic Development
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