It's an interesting question that I have discussed with several home buyers lately.

The economy is on a tear... inflation is rampant... housing markets (including our own) are seeing double digit per year increases in sales prices.

One action that the Federal Reserve is taking to combat these factors is to raise interest rates.

Mortgage interest rates are now approaching 6% -- after having started the year just over 3%.  Wow!

But... if the rates have risen this high to get things (the economy, inflation, housing markets) to cool off a bit... if/when they do, will interest rates eventually decline again? 

I don't know that they'll ever go back down towards 3%, and maybe not 4%... but is it possible within the next few years that we will see mortgage interest rates of 4.5% or 5%?

It seems possible?  I certainly won't say that it is likely, but it is certainly possible.

This possible future reality is providing some residual comfort to home buyers who are going ahead and buying in 2022. 

They can afford the mortgage payments at the current rates of close to or at 6%, but they'd love to be paying a lower mortgage payment for their home at some point in the future.

If their theory holds true... perhaps we will see interest rates eventually decline, somewhat, allowing 2022 home buyers to refinance to take advantage of future lower rates.

Clearly, there is no guarantee that this will happen... but it does seem possible.

 

If only it were so easy.  :-/

If you see a new listing of interest...

...and when we walk through it on the first day on the market you love it...

...and if you are pre-approved for a mortgage...

...and you make a strong offer, above the asking price, without a home inspection contingency or appraisal contingency...

...you'll get to buy the house, right!?

Maybe!?  Sometimes!?

Our local market is still very competitive, especially under $300,000.  There are lots of buyers ready to pounce on each new listing... some who already live here (and are renting) and some who are moving to the area.

On many or most new listings under $300K it seems that there are still plenty of buyers ready to move quickly and aggressively in making strong offers, even with mortgage interest rates having risen steadily over the past few months.

So, as a buyer in this market, especially if you're hoping to buy under $300K... we might end up having to find a few perfect houses on which to make an offer before you secure a contract to buy a home in Harrisonburg.

It can be done... but it's not as simple as just seeing a house that you like and deciding to buy it.  The competition is still high!

 

In a fast moving housing market, it's important to be ready to make an offer quickly after seeing a house that you like.  But... making an offer includes a variety of other decisions that may require more a bit of thought and planning.

This one is perhaps the most straightforward.  By the time you are going to view a house for sale you should have already talked to a lender and have a pre-qualification or pre-approval letter in hand.  You don't want to be in a situation where you like a house but haven't even talked to a lender yet to be able to have a letter documenting your financial ability to purchase the house.  A seller in this market (and in most markets) will not seriously entertain an offer with a financing contingency if a lender letter is not included. 

Ideally, you should know how high you can go on price... and have a sense of what the monthly payment will be at a few different price points.  This will allow you to thoughtfully consider the price that you might want to offer when we are viewing a house.

Many offers are made without inspection contingencies these days.  Are you willing to do so?  It's fine to include an inspection contingency in your offer, but you should know that doing so will make it less competitive if there are other offers on the house that may not have inspection contingencies.

You should think this through (whether you are comfortable buying without a home inspection) before going to see houses... even if you plan to make the decision on whether to conduct an inspection on a property by property basis related to the agent and condition of the house.

Most offers used to include appraisal contingencies, allowing the buyer the opportunity to try to renegotiate the sales price if the appraisal came in below the contract price.  These days that is much less common... and some buyers are specifically indicating that they can and will proceed with the purchase at the contract price regardless of the appraised value... or are stating in an offer that they are willing to proceed at the contract price so long as the appraised value is within $___ of the contract price, etc.

Are you comfortable paying a bit above the appraised value in order to secure a contract on a house?  Are you willing to pay a contract price regardless of the appraised value?  These are, again, questions we should discuss generally even before we think about them specifically related to a house we are viewing.

Furthermore, you should understand (through a conversation with your lender) how a low appraisal will or will not affect your loan terms related to the LTV (loan to value) ratio, mortgage interest rate, funds required for closing, etc.

Yes, we will talk about all of these potential contingencies when we are considering an offer on a specific house... but it can be helpful to think about them generally, and talk to me about them, ahead of time so that you can give some thought to what you are and are not willing to do in the current competitive market.

 

Two years ago the "median days on market" was 15 days in Harrisonburg and Rockingham County.

By a year ago, it had dropped to a median of six days on the market.

Given that interest rates are rising, I thought perhaps we might be seeing this metric (how quickly homes are going under contract) start to rise in Harrisonburg and Rockingham County.

And I was right!  Things are SLOWING DOWN!  ;-)  Wink, wink, nudge, nudge.

The graph above starts by looking at the median days on market over the past five months... the median was five days.

Then, over just the most recent four months... still a median of five days.

Next, over just the past three months, when interest rates started to rise... still a median of five days.

Well what about over the past two months... still a median of five days.

But, ah ha!  I finally found it.  The sign the market is really slowing down.  The median days on market has increased 20% (!!!!) when we get to that last data point... the median days on market over the past month is... SIX days!

:-)

So, bottom line, did things go under contract more slowly over the past month than in previous months?  Oh, yes, by one day. 

Is it a sign that the market is slowing?  I suppose so.  Barely. 

We'd need to see more of a change than what is described above and shown above to conclude that buyer enthusiasm is measurably declining.

Stay tuned to see if that median days on market figure will scrape and claw it's way back up to SEVEN days sometime in the next few months.

 

Now, let's look at the difference between renting and buying over a five year time period...

After soaring from 3.2% in January 2022 to 5.3% in May 2022, mortgage interest rates have actually started to level off and even decline in recent weeks.

The graph above shows the average 30-year fixed rate mortgage interest rate each week for the past year.  Clearly, rates have been rising quickly for the past four to five months... but if you look at the past four weeks, you'll see a different trend.

May 12 = 5.30%

May 19 = 5.25%

May 26 = 5.10%

June 2 = 5.09%

It is certainly encouraging to see mortgage interest rates leveling out a bit with the potential for sticking right around 5% in coming weeks and months. 

Certainly, I'd rather today's buyers were able to obtain a 3.5% or 4% mortgage interest rate if possible... but given the possibility of 5%, 5.5%, 6% or even higher, something right around 5% sounds just fine!

 

Look out... before you know it, I'll be saying the year is halfway over!?  As usual, the months are flying by in 2022 and we are now looking backwards at a full five months of contract (and sales) activity.

The graph above illustrates how many buyers (and sellers) have signed contracts to buy (and sell) homes in the first five months of 2020, 2021 and 2022.

As you can see, the pace of home buying activity increased quite a bit between 2020 and 2021... and this year, it has increased even further.

Higher mortgage interest rates in 2022 might slow down overall home sales activity, but thus far we don't seem to be seeing it here locally.

 

If you're buying a $300K house, will you pay more in property taxes if that house is in the City or the County?

In most cases, you will pay more property taxes if you live in the City.

The analysis above looks at how a monthly property tax bill has changed over the past decade for a median priced home in the City and County.

Wow.  The monthly cost of a median priced home has jumped quite a bit in 2022!  This is related to a variety of changes between 2021 and 2022...

[1]  The median sales price increased from $270,000 to $296,500.

[2]  The average mortgage interest rate increased from 2.96% to 4.27%.

[3]  The City real estate tax rate increased from $0.90 to $0.93.

All of these factors, combined, resulted in a rather significant increase in the monthly cost of a median priced home in our local market.

 

For at least the past five years, I have remained convinced that mortgage interest rates would start rising... anytime.  But month after month, year after year, interest rates did not rise... instead, they fell.

But 2022 has been a bit different.

If you had asked me anytime in the past five or ten years what would happen if mortgage interest rates increased from 3% to 5% in the course of just four months, I likely would have told you that the market would likely immediately and significantly slow down... not to a screeching halt... but certainly to a slower pace than before that enormous increase in mortgage interest rates.

But, here we are, on the other side of rapidly increasing mortgage interest rates for the past four months, and the market seems to still be, doing pretty similar things to what it was doing before mortgage interest rates started rapidly climbing.

Homes are still going under contract very quickly.  Buyers are still often competing with multiple offers, including escalation clauses and waiving contingencies.  Prices keep climbing. 

So, have the rising mortgage interest rates had any impact at all on our local housing market? 

I'd say yes.

1.  Some would-be home buyers are no longer able to afford the homes they would like to buy.

2.  I think some homes might be receiving two or three offers now instead of six or eight that they might have received before.

3.  Some would-be sellers might not be selling after all as they see how their buying budget will be affected by higher mortgage interest rates.

So, there have been changes in our local market as a result of these rapidly rising interest rates, they the higher rates have had a much narrower impact than I would have assumed in years gone by.

One other point of trivia... the last time the average mortgage interest rate was 5.25% (or higher) was... way back in August 2009... almost 13 years ago! 

 

The housing market in Harrisonburg and Rockingham County is moving very quickly right now.  The median "days on market" is only five days... which means that half of homes are going under contract in five or fewer days.  

This fast moving market is largely caused by a supply and demand imbalance.  There are more would-be buyers who want to buy than there are would-be sellers who are willing to sell.

The fast moving market is resulting in very low housing inventory in just about every price range and location in our market.  

Given a quickly moving market and very low inventory levels, many would-be home buyers are thus concluding that they will likely need to make a relatively speedy decision about whether to make an offer when they see a new listing of interest.  

Some buyers, though, might feel like these current market dynamics (low inventory, quickly moving market) are forcing them to make rushed decisions.

So, should would-be home buyers feel rushed and forced into making quick decisions?

No.

It is totally OK for home buyers in this market to make buying (or offering) decisions with whatever speed they would like.

It is OK to move quickly in making a decision about an offer - and yes, that will likely increase your odds of being able to secure a contract on a house.

It is OK to move slowly in making a decision about an offer - and yes, that will likely decrease your odds of being able to secure a contract on a house.

But in the end... you get to decide how quickly you will make decisions about making an offer on a house in the current market.

I won’t be rushing you to make decisions more quickly than you are comfortable... and current market dynamics shouldn’t be some external and magical force that rushes you to make a decision more quickly than you are comfortable.

Let’s start exploring some houses together that you might want to buy, let’s come to understand the market as we go, and then you can make the decision about how quickly to make an offer based on your comfort level and based on how well any particular house fits your needs.

It can be a stressful time to try to buy a home given current market dynamics, but it is totally OK to move at your own speed... whether that is fast or slow... or even if it starts off slow and then speeds up over time.

Did you buy a home in 2020 or 2021?  I'm betting you might stay in that home longer than we might otherwise expect.  After all, who would want to give up that fixed mortgage interest rate that is SOOOO low!

For nearly all of 2020 and 2021, the average mortgage interest rate on a 30 year fixed rate mortgage was below 3.5%.  That is LOW.  For some months during that two year period, the rate was lower than 3%!

When home buyers from 2020 or 2021 think about selling five to seven years from now, I'm guessing a part of the though process of whether to sell will relate to whether they really want to give up that super, super, super low mortgage interest rate! 

Mortgage interest rates are currently hovering around 5%, and perhaps they'll stay there for much of the year, and beyond...

If, seven years from now, you would potentially be selling and paying off a mortgage with a 2.75% interest rate... in order to take out a new mortgage with a 5.25% interest rate... will you really want to do it? 

Certainly, our needs for housing (location, size, configuration, etc.) change over time... and that might supersede a desire to hold onto that fantastically low mortgage interest rate.

All that said, if you were fortunate enough to buy (or refinance) in 2020 or 2021, enjoy that super low interest rate, as it doesn't seem likely that we will see them anywhere near that low in the coming months and years.

 

It's a weird time to be a home buyer... in oh, so many ways!

But here's one of them...

Perhaps you are going to spend $300,000 on the home that you hope to purchase this year... or $400,000... or $500,000... or even more.

Given current market dynamics, this might be how you experience this home that you are going to spend hundreds of thousands of dollars purchasing...

[1]  See the new listing online.

[2]  Drive by, slowing down, looking like a stalker.

[3]  Frantically call or text your Realtor to set up a time to see the house.

[5]  You'll have to make an offer quickly, so no time for a second showing.

[6]  You're competing with several other offers, so no chance of including an inspection contingency.

[7]  Diligently work through the buying process with your Realtor, lender and title company.

[8]  Walk through your home one last time -- oh wait, for just the second time -- on the morning of your closing.

[9]  Attend closing and pay hundreds of thousands of dollars for the home in which you have only spent less than an hour of time thus far.

[10]  Move in, really get to know your home, and fall in love with it!? Hopefully!?  ;-)

The point is... in this fast moving, competitive market... most buyers will find themselves needing to make a decision about a very LARGE purchase very QUICKLY when that "perfect enough" house hits the market!

   

Yes, home prices are going up... and yes, interest rates are going up.

As a result, your mortgage payment (if you buy a house) will be higher now than if you had bought a home a year ago.

But... since I am not able to offer time travel services to my buyer clients... home buyers need be asking whether they should buy a home now within the context of how it compares to if they had bought a home a year ago...

...instead, they need to be asking...

...whether to buy a home today in the context of how it compares to continuing to rent a house for the next few years.

Options for would-be buyers would seem to be...

1.  Buy now (ish)

2.  Buy later

3.  Rent forever

Buy now... this will allow you to lock in the majority of your housing costs.  Your mortgage payment will almost certainly include principal and interest (on the loan) as well as property taxes and insurance... and the taxes and insurance portion can go up over time... but buying a home now with a fixed rate mortgage will allow you to lock in your housing costs.

Buy later... it seems likely prices will likely be higher with only a small chance that they will be lower... and mortgage interest rates will likely be higher with only a small chance that they will be lower... meaning your housing costs will likely be higher if you buy later rather than sooner.

Rent forever... rental rates keep going up, and up, and up... so if you don't buy a home, and keep renting a home, your housing costs will likely continue to go up over time.

Certainly, buying a home isn't the right choice for everyone in every situation... but buying a home does give you the benefit of locking in your housing costs when many of your other costs will otherwise continue to increase given the current inflationary climate!

  

So, you've been planning to and trying to buy a home for the past four months... but despite having made multiple offers, nothing has worked out yet.

This is not as uncommon as you might think -- there still seem to be many more buyers in the market as compared to sellers -- and thus, plenty of would be buyers haven't been able to convert themselves into actual real life buyers yet.

As a conscientious and responsible buyer you likely talked to your lender before you started your home search -- four months ago -- and you became pre-approved for a loan.  Good work!

But... wait.... if you haven't talked to your lender since then... connect with them again ASAP!

Why, you might ask?  Because interest rates have increased quite a bit over the past four months!

Buying a $400K house four months ago with 20% down...

It's a strange time right now -- there are quite a few segments of the market with absolutely no options for buyers.

For example, let's say you wanted to buy a resale home just east of Harrisonburg, in the Spotswood High School district, with at least 2,000 square feet, and four bedrooms...

...and you could spend up to $700,000...

...you should have plenty of options, right?

Nope. 

There are currently... zero homes for sale (that aren't under contract) in the Spotswood High School district, under $700K, with 2000+ SF and 4+ bedrooms. 

So, buyers, as much as you might want to buy -- you will be at the mercy of waiting for sellers to be ready to sell.

And sellers, these extraordinarily low inventory levels in many segments of the market may very well mean that you will have lots of early interest in your home... and you may very well secure a contract with very favorable terms!

 

So, you're getting ready to make an offer on a super popular new listing.  You've heard that there have been 12 showings thus far, and there are already three offers on the table.

You're going through the list of contract terms that you'll propose...

Escalation clauses are all the rage right now when would-be buyers are competing against multiple other offers on popular, well prepared, well priced, thoroughly marketed new listings. 

An escalation clause allows you to make an offer at one price, but have that offer price automatically increase to compete against other offers.

Yesterday, I pointed out that when it comes to escalation clauses...

Today, I'd like to point out that sometimes, your offer with an escalation clause might escalate based on a competing offer that might make you groan when you see it after your offer escalates.

Here's the imagined scenario, on a house listed for $400,000...

Your Offer = $405,000 contingent on financing 75% of the purchase price, escalating to be $5,000 above any other offer up to $460,000.

Offer #2 = $400,000 contingent on financing 80% of the purchase price, escalating to be $1,000 above any other offer up to $410,000.  No biggie here -- your offer escalates to $415,000 and that probably seems reasonable.

Offer #3 = $400,000 contingent on financing 97% of the purchase price, contingent on a home inspection, contingent on the property appraising at or above the contract price, $500 deposit, contingent on the sale of a property that has not yet been listed for sale, from buyers who have not yet been prequalified, escalating to be $1,000 above any other offer up to $460,000.

Oof.  Offer #3 is not likely actually an offer that would be accepted by the seller... but it caused your offer to escalate all the way up to $460,000 -- which is $55K above your original offer, and $45K above how far it would have escalated based on Offer #2.

Pointing this out is not a recommendation that you make your escalation clause super complicated, as that might overwhelm or turn off the seller... but it is important to realize that competing offers that are extremely weak in almost every way except price might cause your offer to escalate just as much or more as a very strong competing offer would.

I suppose, at a minimum, in the situation above, your escalation clause could have at least stated that your offer wouldn't escalate if the competing offer had a home sale contingency? 

 

Consider these scenarios of multiple offers on a house listed for $400,000...

Two offers...

In theory, as mortgage interest rates increase, some buyers will be priced out of considering some homes that they would like to purchase. 

If enough buyers are priced out of being able to afford their preferred home, maybe we will see fewer offers on homes listed for sale. 

If there are fewer offers on homes offered for sale, then perhaps buyers won't keep having to pay so much over the asking price.

If buyers aren't paying so much over the asking price, maybe the 10% per year increase in median sales price in our area will start to move back to a more reasonable 3% to 4% per year.

But, thus far, these are all just theories and possibilities, not actualities.

Despite significant increases in mortgage interest rates over the past month (and 3 - 4 months) we don't yet seem to be seeing a decline in the amount of buyer interest in many or most new listings.

I'll keep wondering if we will see that shift happening... and I'll keep crunching the numbers to see if there is evidence that it is happening... but if you are holding off on buying a home right now because you are absolutely certain that a shift is coming... it might be a long wait.