In just a few short months, the Fed’s aggressive interest rate hikes have forced mortgage rates from 3% to around 7% costing borrowers 60% more on their monthly payments. This sobering realization has caused many buyers to pause their search for a home. The chart below from Mortgage News Daily shows how rising interest rates (the orange line) have significantly reduced the volume of mortgage applications (the gray area).
The level of applications for home mortgages is about a third of what it was this time last year. Below are other central Denver market indicators that show a shift away from a strong seller’s market:
These changes are difficult for both buyers and sellers, but primarily for buyers who have felt the immediate brunt of their reduced purchasing power. Paying the bank 60% more per month for the same-sized loan, or reducing their expectations of what they can afford, is not happy news. While many buyers correctly expect home prices to decrease, prices would have to drop 30% to equate to a monthly mortgage payment on par with January’s interest rates, or about the same drop as the market experienced during 2008’s great recession. We are very doubtful that will happen — the market forces are not the same.
Sellers should expect home prices to drop as buyers exit the market; however, the blow to sellers will be softened by the continued low levels of seller competition, low levels of inventory, as many would-be-sellers decide to forgo trading in their 3% mortgage for a 7% mortgage and instead stay put in their current home.
Overall, we expect a significant decrease in total sales volume and number of transactions for the foreseeable future. Buyers should grow accustomed to higher interest rates and decreased buying power. Sellers should expect prices to decline in the foreseeable future and will need to price their homes accordingly to avoid stagnating on the market. But the drop in home values should not be reminiscent of the 2008 housing crash.