We’ve all been watching the news and reading the reports of interest rates now reaching 6% in some cases for home loans. The Federal Reserve, in their attempt to tamp down inflation, continues to raise the short-term interest rate to engineer what they call a soft landing. That’s where they bring down the rate of inflation without slowing down the economy. Most people don’t believe the soft landing is possible and that the country is headed for a recession sometime in 2023.
What does that mean for home prices, what does it mean for buyers and what does it mean for sellers? First let’s look at the definition of a recession, which is two negative quarters of GDP growth in a row. That in and of itself doesn’t mean the country is falling apart; it just means the country’s economy is slowing. It also doesn’t mean that home prices are going to begin dropping. For example, if you look back at the last 35 years, you’ll see there have been five major recessions. In four of those recessions home prices remained steady and continued to climb upward. It was only the crash of 2008 where we saw a direct correlation between a recession and a drop in home prices. What you can glean from that information is that a recession doesn’t automatically trigger a drop in appreciation or home value. In fact, the data shows it’s usually the opposite; home prices continue to climb but at a more moderate rate. I do think we are long past seeing appreciation rates of 17 or 25%. I would expect a more moderate appreciation of 5, 7 or 10% in the coming years. This is good news for Sellers who may be worried that they missed the peak of the market or that they are not going to get a good value for the home which they intend to sell.
There’s good news here for buyers as well. Buyers will finally get a break and they don’t, in most cases, have to compete against 6, 7 or 10 offers on a property. They most likely won’t have to pay an exorbitant over asking price or waive a bunch of contingencies. We believe the buyers will be able to go back to a more normal market where a house sells in 60 to 90 days and for a fair market value. This should be a welcome relief for buyers; however, some people believe they have missed their opportunity because interest rates are now around 6%. Buyers should not be worried about the interest rate. We will just take the 30-year fixed rate and throw it out the window. We are counseling all our clients to look at lender ARM products. We are encouraging buyers to look at the 5-1, the 7-1 and the 10-1 ARM. all of which are on the mid 4% range and that’s for a jumbo loan, with no points. Some people will say, “well I don’t want to be in an ARM product because when it matures at the end of five years the interest rate is going to go sky high.” Most economists and large mortgage lenders do not believe these high interest rates are going to last. In fact, PennyMac told a lot of their lender partners they thought this high interest rate season would last only 6 to 12 months and then rates would start coming down. If you do go into an ARM product don’t worry, you will be in and out of that loan well before it ever matures and refinanced into something with a lower interest rate that’s more stable.
If an ARM product is not your cup of tea, there are other strategies that we can employ as well. For instance, if you did want to go into a 30-year fixed at 6% you could buy down the rate, say a point down to 5%. General rule would be about 1% of the purchase price to buy down the rate one percentage point. So, if we are buying $1 million house, one percent of that is $10,000 and that’s what it would cost you to buy down the rate one percentage point. But now you say, I don’t want to spend an extra $10,000 to buy down the rate. Don’t worry, we’ve got a solution for that as well. During the crash years almost every contract we wrote included a seller concession. Meaning that you would offer a fair price for the house and then ask the seller to give you X amount of dollars towards a seller concession. That concession could be used towards your lender’s prepaid, closing costs, and other fees associated with your loan. So, in the case above we would write the contract giving the seller what they wanted for the house and then ask them to give the buyer a seller concession of $10,000. This is done in the contract and is completely legal; and in doing so the seller pays for the buyer to buy down the rate by one percent and get into a more affordable loan.
In summary, we believe we are in a time of price stabilization. We don’t see prices going down but prices remaining stable and continuing to increase at a moderate rate no matter if there is a recession or not. Sellers still have an opportunity to get top dollar for their property and buyers now have an opportunity to pick up a property without having to compete with a gazillion offers. Finally, we have outlined two strategies where we can keep the interest rates at acceptable levels without breaking the bank on your monthly payment. Hope this helps, and happy house hunting.
Dan Polimino is the owner of the Hawai`i Team in Kailua-Kona, Hawai`i. He and his team are the luxury residential experts for the Big Island. If you are thinking about buying or selling in Hawai`i, then please reach out to us at team@thehawaiiteam.com.
