Highest Mortgage Rates in Over 20 Years

As of September 22, 2023 mortgage rates have climbed to their highest levels in 20+ years hitting 7.5% for a 30 year fixed rate mortgage. With rates not seen since 2003, back when the terminator was just elected governor, we cant help to wonder how this will affect real estate and the overall economy. Obviously, no-one knows exactly how things will play out in the next 12-24 months, but from a surface level understanding of economics it seems clear that these high interest rates will weigh on real estate values and cause them to fall. But as of September 2023 things haven’t played out that way. Sales volume is down, time on market is up, and listings numbers are down but strangely enough home prices have seen a slight increase over that same time period.

So what’s the deal? With higher rates and fewer homes for sale you have to think that supply will increase and prices will drop, Right? Not quite that simple.

Coming from 2 decades of low interest rates have created and interesting situation for home owners and potential buyers. With a large majority of home owners who have bought in the last 15 years they have record high levels of equity in their homes with a mortgage likely bellow 4%. This creates a problem for home owners who are looking for new homes. Their options are to sell and buy a new property with a 7%+ mortgage rate or keep their home and rent it out, as their mortgage rate is irreplaceable.  This has been one of the contributors of supply staying low during at rate hike of more than double.

There has not been the forced selling that typically comes with an economic downturn which has kept home prices very stable over the last year. Could that change? Absolutely but without a supply shock to the markets it is likely that home prices will remain stable for some time to come. Of course some markets will be affected more than others but red hot markets like Florida, which greatly benefited from population increases due to the 2020 pandemic, are likely to remain hot.

However if rates are to remain elevated for a longer duration of time the rates will take hold on and work their way through the economy causing softness in markets like real estate. If people lose their jobs, institutional landlords flood the market with supply, or WWIII breaks out then it is likely home prices will suffer.  Only time will tell but at the end of the day waiting for the world to fall apart or playing the market timing game is never a winning strategy.

We are living through one of the greatest financial and economic experiment of all time and no one knows how it will play out. In times of uncertainty and doubt is where  opportunity lies and only time will tell if now was an opportunity or a trap. “Be fearful when others are greedy and be greedy when others are fearful”