There Is More Than Meets the Eye

Housing affordability is at a low – so what does that mean to you? In my last newsletter, I wrote about how interest rate rises are going to effect buyers (or not effect buyers). In this newsletter I want to examine how rising interest rates might actually cause housing prices to go up, not down!
For those investors out there, a Capitalization Rate discussion will come in due time. For now, I want to examine how sellers are actually going to benefit from a steady rise in interest rates.
The California Association of Realtors recently published an article in their November/December 2015 issue entitled “The Affordability Squeeze” that discussed how current homeowners are hesitant to sell because they personally cannot afford to re-buy where they want. In fact, they provided the following to show how dramatic of a change has taken place in California:
-In Q1 of 2012, a median income of $56,324 was needed to purchase a median-priced home
-In Q2 of 2015, a median income of $96,160 was needed to purchase a median-priced home (99% of the increase in the required income is attributed to the increase in home prices)
And this is exactly why I am going to pitch to you that as interest rates rise, home prices will as well (at least in the short-term). If you go for morning coffee on Saturday, the local paper will have real estate on the front page. At the neighborhood BBQ the conversation flows from the steaks on the grill to what the home down the street just sold for. People inherently want to be apart of what is going on (for those not familiar with bubbles, housing is one that almost always follows this cycle – along with tulips).
So let’s flash back to last week’s newsletter where I stated that an interest rate increase would only marginally influence the buyer’s ability to purchase a home. The trick though, is that as everyone in the Bay Area/California/United States prepares for an interest rate rise, buyers look to buy. And as interest rates inch higher and higher, buyers are going to be even more determined to buy as they fear getting priced out of housing stock (via their monthly payment on a mortgage). The Bay Area is an extremely supply constrained market, and as a result, low inventory produces a lopsided market of an abundance of buyers with limited selection. As interest rates rise, and more potential buyers make the decision that if they do not buy now, they are going to be priced out, the demand side of the equation gets a nudge up. With more buyers in the market competing over the inventory, offers need to become even more competitive to win out against the completion. This can be achieved through many different methods, but the easiest and most common is through price.
Interest rate increases are likely going to push those that were on the fence to actually go and buy. With more buyers likely to hit the market, the economics of the equation push home prices up.

We are making the assumption that the economic climate stays the same and inventory does not flood the market. These are two pretty big assumptions, and as we reach the later innings of the expansion phase, the question is when will history start to repeat itself.
If you ever have any questions at all, please do not hesitate to reach out. At MinnGo, we realize that real estate is not something our clients think about everyday. Lucky for you, that is what we live and breath.

Until next time.