Will 5% Mortgage Rates Mean the End of a Seller’s Market in Real Estate? 1024 768 Matthew Cooney

Will 5% Mortgage Rates Mean the End of a Seller’s Market in Real Estate?

We are currently in a seller’s market for residential real estate. The national housing supply is at 4.3 months which is below the 6 months of inventory typically considered a balanced market. According to Freddie Mac, the 30-year mortgage rate is at 4.72%. As mortgage rates continue to creep up towards 5%, will a rising interest rate environment trigger the switch from a seller’s market to a buyer’s market or at least a more balanced market?

First, let’s take a look back in history. If interest rates rise above 5%, they will still be well below the extreme highs we saw in the early 1980’s when 30-year mortgage rates climbed above 18%. Rates didn’t stay at those highs for long but it’s hard to imagine how today’s buyer would react if rates were at those levels or even if they were in double digits.

Obviously the early 1980’s are an outlier when it come to mortgage rates but its important to point out that according to Freddie Mac, 30-year mortgage rates never fell below 6% between 1971 (when they first started recording them) and 2002 and were often far above it.  Rates only dipped below 5% for the first time in 2009 when the housing market was melting down. Therefore, on a historic basis, a 5% mortgage loan is cheap money.

What exactly does an increase in mortgage rates cost the borrower? Well, first there is the psychological cost of 5% rates. Crossing this barrier will most certainly draw dire predictions of buyer’s walking away from the housing market en mass. This will probably not happen due to the fact the difference between a 4.5% rate and a 5.0% rate translates to $30 a month for every $100,000 borrowed. Yup, a dollar a day for every $100,000 you borrow is the difference between owning and not owning that house or to put it another way – all that separates you and that $400,000 loan is your daily latte fix.

There is another factor that must be considered in all this. According to the National Association of Realtors, 20% of all transactions in August 2018 were cash transactions. That was the same percentage as the previous year. This should further erode fears that 5% interest rates will drive all of the buyers away. In the worst case, it will only drive 80% of buyers away which of course, is not going to happen.

Existing home sales have slowed down over the past couple of months. This appears to be the result of a prolonged increase in prices which is pushing some buyers away. It is a logical conclusion that as money becomes more expensive, buyers will be less willing to make the same offers. This will put additional pressure on sellers who in turn will need to drop their prices. This could result in a more balanced market, which is a good thing.

For more information, or if you need a referral for a knowledgeable Realtor© in your area, contact:

Matthew Cooney
Sales Associate
Coldwell Banker Residential Brokerage
211 South Street
Morristown, NJ 07960
(C) 973-832-5932
(O) 973-267-8990 x153
(F) 862-345-3273