It is virtually impossible to read the headlines these days and not read or hear something about the housing market. Whether the media is talking about interest rates or house prices going up or down, or housing affordability or inventory of homes, affordable housing concerns, etc. You do not need to look very far to find something that points to the fact that we have a looming housing crisis on our hands in this country.
So, let’s break some of these issues down and get a better understanding of the challenges and what we can expect going forward:
First and foremost, mortgage rates have an indirect (not a direct) correlation to the Fed Funds rate. Which means, when the Federal Reserve increases (or decreases) interest rates, that does not have a direct impact on mortgage rates. Mortgages rates are more closely correlated to US Treasuries which traditionally are impacted by other economic factors like GDP, the job market, unemployment stats, new construction, etc. Big picture, when there is inflation, rates go up and when there is a recession, rates go down. We have seen interest rates rising for the last 12 months and every time it seems there is an end in sight, rates go up more. However, I firmly believe what goes up must come down and interest rates are no exception.
You can do a search on the internet and virtually find an article that supports any opinion that you might have. If you believe home prices are going up, you can certainly find an article to support that opinion. However, I would say there are more articles today that support the opinion that home prices are dropping. In fact, many would argue that we have seen home prices drop since last April 2022 which the industry is calling the peak of the housing market. However, let’s confirm what drives home values up or down. Most importantly, it is supply and demand. Overall, we have a very limited supply of housing here locally and not enough new homes are being built annually to support the demand. We also have a great job market and economy here locally which also supports strong home prices. Therefore, in my opinion, we might be in the middle of a correction in home values because home prices were completely off the charts due to COVID, people working remotely and low interest rates, but I firmly believe that home values will stabilize and start to go back up very soon. In fact, that has already started to occur in many neighborhoods across the front range.
Well, this gets back to a few fundamentals that we discussed already, interest rates and home prices. As interest rates have gone up, the cost to borrow money has gone up and therefore has decreased most homebuyers’ overall affordability. Let’s take an example using a $500K mortgage. At 3%, the principal and interest payment is roughly $2108 per month. However, at 6.5%, that same $500K mortgage now costs someone $3160 per month. That is an extra $1,052 per month. The impact that this has on many buyers is a reduction in their overall affordability by over $150K in their purchase price. So, if someone was able to afford a $750K home, the increase in rates has decreased their affordability to around $600K. Do you think also explains why home prices have dropped possibly? So, once we see rates drop, affordability will improve, and prices will start to skyrocket again.
This is probably the largest reason why I do not believe we will see a drop in home values, regardless of rising rates. Simply put, we have a shortage of homes given the demand and there is not enough affordable land for builders to build new homes and be able to make a profit. Therefore, we are not building enough new homes to support the ongoing demand for homes. This is a problem across all price points from first time buyers to move up buyers to affordable housing and homes for older homeowners to age in place.
Lastly, our property taxes are going to go up substantially since we just saw assessed values increase by 39% on average in CO. With all this being said, there is over $11 Trillion of senior home equity in the US, which is almost $4 Trillion more than all of the 401K money in our country combined. What this means is that housing wealth is generally the largest asset that most seniors in the US have today and yet it is trapped in people’s homes. So how can you access the trapped equity in your home? The simple solution is to just sell your home. However, this is not so simple because you still need a place to live, and we just talked about the fact that there is not enough inventory of homes for people to buy. Plus, there are some potential capital gains taxes you must consider if you have owned your home for a while. So, the next best option is to get a mortgage to access some of the equity in your home. This can be a great option for many people because the money that you take out of your home is considered a loan and therefore you do not have to pay income taxes on that money (this is not tax advice, consult a tax advisor). However, taking a mortgage then requires you to make monthly payments which can be counterproductive, especially in retirement when you are living on a fixed income, and you are looking to increase cash flow and reduce expenses. This is where the Home Equity Conversion Mortgage is a fantastic option because it provides you with all of the benefits but does not require you to make a monthly mortgage payment as long as you live in the home, pay your property taxes and home insurance.
By Gabe Bodner. Gabe is a retirement mortgage planner and licensed mortgage originator in Colorado. Gabe utilizes the latest research from the top researchers to assist his clients to live for today and plan for tomorrow. To reach Gabe, call 720.600.4870, e-mail [email protected] or visit reversemortgagesco.com.