And it says: not enough sellers. When people are buying at the same rate that homes are being listed, prices have no where to go but up. But we don’t experience that phenomenon entirely throughout the year, and the last few years that gap has finally begun to widen – until COVID.
Interest rates do not drive demand per se
The other myth I want to dispel: “interest rates are driving demand.”
Simply put, that does not happen. Nobody – and I mean nobody – decides to buy a house because interest rates are low. Interest rates make housing more affordable if the buyer is getting a mortgage. That’s it. And, with the run-up in pricing over the last couple of months, one could argue that low-interest rates are having a neutral effect on many buyers – they paid more for a home even though the interest rate was cheaper – so net-net, their monthly payment stayed the same.
Roughly speaking, rates were down anywhere from half an interest point to a full point or more. One percent of interest is approximately equivalent to 10% of purchase price in terms of a buyer/borrower’s monthly payment.
So while interest rates don’t cause a person who was out of the housing market to jump in, unless it was purely an affordability issue – and as I just said, with higher prices, the buyer’s payment is still about the same. On the other hand, record low rates may cause people to spend more. I have experienced more than a few buyers recently who essentially said, ‘with rates at under 3%, who cares if I spend another 50-grand?’
Of course I never make that case to my clients. Most people don’t stay in their homes for 30 years, therefore at some point sooner than later, they are going to sell their home. That extra $50k is going to matter if the market has not gone up to cover the extra money they spent.
I suspect we will begin to see a softening this month and into September as people start to deal with: a) kids going back to school and b) going back to work from summer vacations (yes, people did take vacation). Historically September is a slower month for real estate, where inventory builds and prices soften before the year end tick up.
I am going to go on record (again) and say that September and October will not be like this spring/summer boom. The election cycle, plus any other downstream effects of the pandemic could easily impact what is already a typically slower time of year. I believe we will see a building of inventory and softening of prices. Whether that continues into 2021 or not – that’s too soon to say.