How are the Rising Interest Rates Affecting the Real Estate Market?

Interest rates are on the rise coming from an all-time low last 2021. How does this affect the real estate market?

Interest rate is one of the key indicators on determining how the real estate market is faring. In 2022, it has increased significantly from an all-time low last year. Scott Himelstein discusses in detail how does this affect the real estate market.

The first thing that we need to do is to compare the numbers. Last year, rates were at an all-time low of about 2.5%. Currently, now in January of 2022, we are hovering around 3.7%. That is more than a percent difference and this greatly affects the buyer’s monthly payment. Let us look at an example - say there’s a home with a $1 million purchase price and a 80% loan amount of $800,000. If we are back in 2021, our monthly payment (combined principal, interest, taxes and insurance) would be around $4,200. Now, if we take that same mortgage amount and apply it now in 2022, the monthly payment would be $600 higher of around $4,800 a month. That is a big difference and it results to some of the buyers being priced out and not being able to afford as much.

However, there is a big BUT. Aside from the increasing interest rates, there is also an ongoing issue between supply and demand. That is, how inventory is very low at this time. Currently, there is under a half-a-month’s supply. It means that if no new houses came on the market for sale, it would only take approximately 13 to 14 days for all of the existing inventory to be sold in the San Fernando Valley. Typically, a normal market would need six months to have a healthy supply of inventory. Even though there were more homes that came to the market in the Fall of last year due to forbearance (Learn more about forbearance here) and more sellers feeling comfortable to list their home for sale during the pandemic it was not even close to being enough to meet the demand. 

In short, even though there is an increase in the interest rate, because of the lack of supply, we are still expecting to see prices go up every month although not in double digits. Most experts  believe this upward trend in price will continue for the remainder of 2022. 

At the height of the spring 2021 bidding war bonanza, the number of homes for sale was 43% below pre-pandemic levels. Given that the demand side of the market is unlikely to back off much - there’s simply too many millennials aging into their first-home buying years - the supply side (a.k.a. inventory) will dictate what the spring 2022 housing market will look like. As of December nationwide, there were just 1 million homes listed for sale on Zillow. That’s down 17.5% from January 2021, and down 37.8% from January 2020, when there were nearly 1.7 million homes for sale. This means the housing market is tighter right now than it was heading into the hypercompetitive 2021 spring housing market. In Los Angeles, there is a difference of less than 50% of inventory, from pre-pandemic levels compared to where we are right now. In Porter Ranch, that figure is closer to about 65%. This is why we expect the market to keep on going as we see every open house we attend is filled with potential buyers.

“ Despite the increasing interest rates, the lack of supply will result in home prices going up this year.”

If you need timely advice on putting your home in the market or you are looking to buy one, give us a call at 818-396-3311. We would be happy to assist you.