Is My Home Next?
For the first time in about a decade, many American homeowners are experiencing a weaker housing market.
Earlier this month, we had the opportunity to speak with a great group of local builders. It was so enjoyable to visit with experts who have such interesting insight into real-time local trends. And while speaking with them, I realized we haven’t spent much time discussing real estate here, despite it representing one of the largest assets for many of our clients.
We have written about inflation and the impact rising rates had on stocks and bonds. Real estate certainly has not been immune from inflation pressures, either.
Publicly traded Real Estate Investment Trusts (REITs), which are companies that own and/or operate income-producing properties, struggled last year, as did shares of homebuilders. REITs fell about 32% from their high to low during 2022, while homebuilders dropped over 40% as a group[1].
What about residential real estate? The chart below shows year-over-year percentage changes in home prices for the U.S. and for the Kansas City market.
Like many other assets, homes experienced exceptional price appreciation during the pandemic[2], both nationally and in the KC metro market. At the very peak in 2022, KC home prices were up 19% compared to the same period in 2021.
The price declines experienced by stock, bond, and public real estate owners in 2022 may now be hitting residential homeowners. Home prices have come down each of the last five months, at least at the national level, while months of new home supply has grown from 3 months during 2020 to nearly 9 at the end of last year. It is no surprise that rising rates would put pressure on home prices. Many home buyers think in terms of the monthly payment rather than the actual purchase price. So, let’s use that framework to help put some context around the rise in rates and what that means for home purchases and prices.
The green line in the chart below shows average 30-year fixed mortgage rates since 2000. The dashed brown lines represent the recent peak (7.08%) and trough (2.67%) in the 30-year fixed. How much less home can a buyer afford if the cost of borrowing rises from 2.7% to 7%?
We need to make a few more assumptions before we can answer. I’ll use the following:
Borrowing 80% of the purchase price and putting 20% down
Term of the loan is 30 years
Buyer can afford $2,500 per month in principal and interest payments (but don’t forget about taxes and insurance!)
Using those assumptions, here is the difference in how much home a buyer can afford:
Bumping interest rates from 2.7% to 7% means this buyer can afford $300,000 less home. Again, this is before taxes and insurance. Quite the difference.
What does this mean for homeowners?
I don’t know of a one-size-fits-all answer. Homes are very personal. Some people are emotionally attached to their homes and could never imagine leaving those memories or that property behind. No price would be worth moving. Others view the home as an opportunity to build equity over time and are comfortable moving with some regularity.
We typically do not consider the value of someone’s primary residence during the financial planning process, at least not as an available asset to fund a specific goal. Regardless, it is not uncommon for families to be curious about how the value of a home could impact other goals and discretionary spending.
Interested in talking more? Email me at eric@divviwealth.com or set up time with the Divvi team to continue the conversations.
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