High Mortgage Interest?
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Authored: November 16, 2022

Stop running

Running from high mortgage rates? Slow down there. This could be the best time to buy a new home in years.

If you are putting off your new home purchase due to high-interest rates, you could be missing out on some serious discounts.

~Joel Carson

If you are putting off your new home purchase due to high interest rates, you could be missing out on some serious discounts. Interest rates are temporary. A home purchase is one of the most important investments a person will ever make. If the right home comes along, snag it regardless of the interest rate!

Interest rates will always fall

Country Mortgage Lender Broch Lassig and I had a discussion about the Utah housing market recently. Broch is my preferred lender and we often discuss market conditions. My clients depend on me to stay abreast of market trends (even when I don’t particularly love them). We agreed: interest rates can always rise but they will always fall. Home prices, not so much.

Utah homes are discounted

Home prices do fluctuate with market conditions. We’re talking about average and median home prices here. You can look at those numbers broadly, i.e., United States home prices. Or focus on a state, city, or neighborhood. Don’t get caught up in looking at individual home prices to evaluate the market. There are so many factors that go into valuing a home, I think it will behoove us to keep it general here.

Bidding wars were all the rage throughout 2020 and 2021. The number we want to look at in this case is the “percentage of listing price.” Look, a home is worth what someone is willing to pay for it. You can list your home for sale at any price you want. That doesn’t mean it will sell.

Many factors are taken into consideration when professional real estate agents perform what we call a “comparative market analysis” and a “home valuation.” Sure, we look at comparable sales in the neighborhood where the home in question is located. We also consider the condition of the home, the age of its systems, curb appeal, size, features (or lack there of), landscaping and many others to come up with a solid listing price.

What we can not account for in determining worth is a buyer’s emotional attachment, or the myriad reasons people form certain attachments to a home. In the past few months (or years) nothing about the way we value homes has changed. Valuing them and pricing them are two different stories. If demand is up and supply is down, we value a home the same way we always have. What changes is the amount people are willing to pay for homes.

Why? Because mortgage lenders and investors want solid home values when they assume the risk of lending on them. Emotion has no bearing on the bottom line.

For example, lenders do consider:

  • comparable home sales
  • square footage
  • rooms – size and type
  • lot size
  • age
  • condition
  • unfinished square footage
  • garage size
  • extras

Lenders do not consider:

  • whether or not your Aunt Margaret lived in the home and baked cookies for you every Wednesday
  • how conveniently close it is to your work
  • how much you love the peonies in the back yard
  • that you are finally returning to neighborhood that built you

Real estate professionals are required to make adjustments for certain physical properties of a home to advise sellers of the best possible listing price. Banks want to be absolutely sure of their investments, so when they consider how much they are willing to lend on a home, they require a formal appraisal. A professional appraiser takes these considerations one step further with a much more detailed report (usually after a buyer has formally applied for a loan). The listing price and appraisal should really be in the same ballpark. If an agent’s valuation is high, a low appraisal could cause issues with funding (mortgage companies rely on the appraisal for guidance). No one wants to lose a home (or a sale) that way.

In 2019 and 2020, the market seemed a little crazy. Demand shot up. Supply was severely lacking. Prices skyrocketed. Bidding wars ensued. You can pay what you want for a home (hey, it’s a free country) but you can’t always borrow what you want to pay. That put people with cash-in-hand in a premium position. 

The Wasatch Front Regional Multiple Listing Service (WFR-MLS) tracks housing market statistics. Two of the many statistic it tracks are:

  • listing price
  • sale price
  • the percentage difference between the two

In 2019 Utah buyers of single family homes, condos, and townhomes paid a median of 97% to 99% percent of the listing price all year on a monthly basis.

In 2020 Utah buyers of the same types of properties paid a median of 98% to 101% monthly throughout the year.

Then, 2021 rolled in with a bang. In January 2021 buyers were snapping up properties at a median 102% of the asking price, then 103%, then 105% of asking price.

Remember, we’re talking about the median price here. That means, just as many buyers paid more than 105% as those who paid less. The median number is right in the middle. 

In order to do that, in most cases buyers had to come up with cash to compensate for the amount of money a mortgage lender was not willing to risk.

In the end of 2021, we began to see a change.

By July 2022 homes were selling at a median 98% of listing price. That dropped to 95% in August, then 94% in September.

In October, homes sold at a median 95% of asking. So far in November, we’re at 93% (it’s early yet).

I am now strongly encouraging my sellers to price their homes 10 percent below its value. On a $500,000 home, that’s a reduction in price of a cool 50 grand. In many cases, my sellers are once again receiving multiple offers.

What happened to home prices?

Interest rates happened to home prices. In 2022, the Federal Reserve increased interest rates six times (see Fig. 1). The Fed is trying to intentionally slow down the United States economy to avoid a recession. While homes are selling, people are shying away from a big purchase with a high interest rate.

I’m here to tell you, that’s the wrong thing to do. Home values are still up, but sales are down and that decreases the demand (which, in turn decreases prices). In our market, that’s temporary too.  

If you buy a $500,000 home that is discounted by 10%, you’ll save $50,000 from the get-go. If you get a mortgage at a higher interest rate, your payments will be higher than they would have been a year ago, but you won’t pay nearly as much in additional interest as you will save in the cost of the home.

What did I tell you awhile ago? Interest rates will always fall. When they do, simply refinance. 

With that kind of savings, you can also buy down your interest rate with points or take advantage of one of the many programs designed to help you save. 

When you refinance, you’ll save on interest and the amount of your payments, but your home will still be valued at $500,000. In many cases, that means instant equity.

I’ll say it again, interest rates are temporary.

Homeowners are way ahead

Home prices are down, but your home value is likely up. If you purchased a home one year ago, you likely still have significant equity. Sell your home, cash in on that equity, buy a discounted home and your net profit/loss will begin looking very good to you.

If you want professional assistance mapping out your real estate future, let’s talk. Give me a call at 801-673-3333 and I will give you a breakdown based on your unique situation.

Joel Carson

Salt Lake City's #1 Agent Utah Real Estate President/Principal Broker