The first week of February is too early for the annual “scare the buyers” article from The Boston Globe. I guess it was a slow news cycle in the real estate division. This annual tradition of throwing together statistics without context usually occurs a bit later in the year. In 2017, it was at the end of February. I thought that was too early, too. In 2020, it was in the middle of April.
This year’s word is “sky.” Prices “skyrocketed”; mortgage payments will be “sky-high” because of “sky-high” rates.
We are here to provide some level of sanity.
Here’s what you need to know to protect yourselves from the adrenaline rush that comes from this type of real estate reporting.
- The market is favoring sellers. You know that. You do not need to have your noses rubbed in it.
- You are buying in the market that is, not the market that will be, nor the one that was. Be here now.
- If you want to torture yourselves by staring at how much appreciation there has been in the past few years, go ahead. But you don’t have to. We are watching this. We are accounting for it when we do our market studies for you.
- If you are looking at these statistics remember the following things:
- Pay attention to what the figures are showing.
Sales volume: the number of housing units sold in a given period. This is the amount of business that is being done.
Median sales price: The middle price from a list of all properties sold. If the housing stock is the same, year over year, this is a more accurate figure than an average.
Average sales price: That figure is calculated by adding all the prices together and dividing by the number of prices. This figure is more accurate with a large number of sample prices. For small groups of properties, a very high or very low sale can distort the validity of the data.
- Consider whether there are changes in the type of properties for sale in 2019, 2020, and 2021. There are differences. They affect pricing. Difference in what is being sold accounts for some of the price increase data (although, certainly, not all of it).
Properties that are recently renovated sell for higher prices than properties that need updating. There has been an increase in renovated properties on the market. That extra $100,000 in renovation costs is added to the sale price. Therefore some of the increase in price is due to the sale of improved properties.
Larger properties have been more popular since March 2020. Larger properties are more expensive than smaller ones, typically. So when the data are about all houses or all condos, the properties sold since March 2020 tend to be larger and more valuable.
Even reinforced by an objective way to look at the real estate statistics, they are still grim for buyers. There is no getting around that. Sales volume is down. There are not enough properties for sale. Demand is stacked against buyers; it’s high. Prices are expected to go up in 2022.
Price increases may get slowed down by increased mortgage rates. If the prices rise less, but your mortgage payment is the same, that’s nothing to celebrate.
What happens to your mortgage when rates go up?
If your rate changed from 3.5 percent to 3.75 percent, the cost would be an additional $14 per month, per $100,000 of principal. That additional .25 percent costs $15 per month, per $100,000 more, when the interest rate changes from 4.5 to 4.75 percent.
Quick math: Calculate somewhere between $15-20 per month per $100,000, if your rate is going up .25 percent from what you were originally quoted.
Here’s an handy-dandy calculator to do this math yourself.
The hard sell scare tactic:
If someone is trying to scare you, they quote your monthly payment compared to the lowest interest rate they have the nerve to quote.
OMG! Compared to 2.75 percent interest, you are now paying $565 more a month on your 4.75 percent loan for $500,000. (2 percent increase costs $113 per $100,000.)
Let me deconstruct this:
- Interest rates were at 2.75 percent for a heartbeat. That rate was not available for some condos or some borrowers. Most of the super-low rates were on 15-year mortgages, not 30-year mortgages. So, the 2.75 figure is being used just to freak you out.
- Increasing interest rates, if they sustain at a higher rate, will reduce demand because of reduced affordability. This will eventually slow demand and cause a leveling off of prices. That will make it easier for buyers, not harder.
- Interest rates are not going to go up 2 percent in a heartbeat. There are three interest rate increases expected in 2022. Each one will reduce demand for housing, as discouraged buyers quit.
- Don’t listen to the sales rhetoric.
- When you discuss your potential mortgage with a lender, require that the lender calculate your monthly payments, with insurance and taxes.
- Ask your lender to tell you what interest rates are doing, right now, and what they expect. Their fingers are on that pulse all the time, so they can make a guess at it.
- Calculate out a worst case, and buy accordingly.