Since the start of the year mortgage interest rates have risen about 60%, and they’re widely expected to continue rising. That is a very sobering thought for those searching for a house. In essence, it means a homebuyer’s purchasing power has dropped 20% since New Year’s Day. That $600,000 budget now looks more like a $500,000 budget.
The idea is that the rising interest rates will act as a fire extinguisher for inflation in general and the hot housing market, slowing down home price acceleration. It will certainly be painful in the interim, and unfortunately it will price some people out. However, if the end result is more balance between buyers and sellers, we will have a healthier housing market. Sellers may want this gravy train to keep going on forever, but house hunters have seen enough of the bidding wars and astronomical over-asking sale prices.
It’s tricky though and nobody knows how long this desired effect would take to appear. The fundamental issue of low supply (primarily caused by a decade-long dearth of new construction and the high cost of ramping that back up) is still there. With supply already being low, will lower demand help those who are still in the market to compete?
Right now, most of what we could use to help answer that question is anecdotal. It takes a month or so to see real data, and by that time the market may have changed all over again. It may be too early to look for trends but we can read a few tea leaves- namely, pending sales. These are the houses that found a buyer but have not yet closed. They give us a real-time look at actual decisions being made, when people are staring down the barrel of a 5% mortgage rate.
I looked at these pending sales for the past two weeks and compared them to the same two-week period last year. You remember 2021, back in the halcyon days of sub-3% interest rates, making money almost free? Well, back in 2021 there were 775 pending sales on Portland’s west side recorded during this timeframe. This year that number is down to 615, a 20% drop. Yes, there are less active listings overall this year, but that number is down about 10% so it would only account for half the reduction in pending sales. In addition, those listings that went both active and pending in the same two week period- meaning the ones that went quick- were at 48% last year and 38% this year. It’s all an indication that while plenty of houses are still finding buyers quickly, less of them are doing it at these 5% interest rates.
What does that mean to you, the buyer? It means that opportunities may be appearing where they weren’t before, and there’s at least a slim chance that competition will cool a bit in the coming weeks and months. This rule still applies: it’s better to buy a cheaper house at a higher interest rate than the other way around, since refinancing can become an option should rates go down again. If home prices start to get some control before rates rise any more, we could just see something resembling a healthy housing market again.
