I don’t have to worry.. He said. I paid cash for my home…
I struggled not to spit the instruments out… Their cold silvery glint leaving a metallic taste in my mouth… At that exact moment, my dentist was double checking the Dental hygienist’s work as he sat proudly in his chair.
“When I bought it, I paid cash for it with the proceeds from the home I sold in California” he confidently smiled.
Raising Interest Rates Stops Inflation
There is a “fever in the air” about rising interest rates, and rising inflation. For those of us who are old enough to remember “Stagflation” under President Carter, it is a bittersweet memory.
The inflation rates under President Carter were devastating to the American Economy. That, amongst many other things led to the landslide election of President Ronald Reagan.
President Reagan inherited a 14.8% inflation rate and Paul “Tall Paul” Volcker as Chairman of the Federal Reserve. At an imposing 6’7″; Paul Volcker’s primary responsibility was to stop the rampant inflation crippling Americans, and stabilize the economy. To curb the rocketing inflation during that time, Tall Paul had to raise the federal funds rate rapidly, and decisively.
Ultimately, it resulted in 22% interest rates, resulting in a deep recession during 1981-1982. This period of time was one of the worst economic times the United States had known (up until that time) since the Great Depression.
Unlike 1980, we are unable to raise our federal funds rates, or interest rates anywhere near 22% without bankrupting America. However, the Federal Reserve has already increased the rates and plan to do so aggressively to help combat our current rising inflation.
What 4 Out Of 5 Dentist’s Don’t Know
Not just my dentist, but most people aren’t aware of how rising interest rates affect home values.
What he didn’t know was that while he might have bought well, and paid cash it doesn’t mean his neighbor did. This is what most people don’t think about, or know.
You see, when the Federal Reserve raises the federal funds rate, it ultimately trickles down to other interest rates as well. Including Mortgages.
So while my California transplant dentist may have paid cash for his home.. and he may even have bought it before things “peaked out”.. he still will feel the effects of rising interest rates should he need to sell within the next 5 years.
Here’s why (and How)
It’s undeniable that the abnormally low interest rates have brought an entirely new dimension of homebuyer to the American Homeowner.
Buyers have come from everywhere. From the rise of iBuyers (Internet Buying Companies) and increasing amounts of “Out of State” buyers who join the regular local home buying public.
Lower interest rates widened the pool of available buyers to the market. This resulted in a chaotic scene of multiple offers, homes being sold without inspections or appraisals; homes sold in the worst of condition, at the highest of prices.
I’ve seen it. And so have you.
Because of this, there are a lot, and I mean a LOT of people out there who bought homes, (many with mortgages with low interest rates) at exorbitant prices within the last 2 years.
As long as the prices keep skyrocketing up, and the interest rates stay low; there’s no way to lose… right?
Short Memories Lead To Short Sales
The problem with this scenario begins when the interest rates start to increase… which they are.
Oh sure, I know the online article will read that “mortgage rates continue to drop” and “in a reversal from a rapid rise”..
But if you look at the historical data on 30 year mortgages collected by Freddie Mac since 1971; you can see for yourself what the truth really is.
In an attempt to fight inflation.. The Federal funds rates have already risen since the first of the year, and the Federal Reserve has scheduled to do more.
As the mortgage interest rates rise, the ability (and amount) of buyers to actually buy homes at the rate you purchased them decreases.
A Tale of Woe (Not Always Fiction)
If the average Tucson home sold for about $350,000 in January of 2022, with 20% down ($70,000) at a 3.5% interest rate; the principal and interest payment together would be $1257 per month.
Add another $150 per month for Taxes and Insurance, and your payment is roughly $1400 per month.
“Not bad,” you think.. “I can manage that.“
Fast forward to today… July 2022. Just 7 months later. The job you once had “in the bag” has laid you off. Or perhaps the love of your life has deserted you, maybe there are bad memories for whatever reason… And now, you need to sell; and that’s where the rub is.
Suppose your home is still worth $350,000 (after all, you still have moving boxes in the attic) . With the same 20% down (70,000) that someone else has to come up with to buy your home… they now have to qualify for, and agree to an interest rate of roughly 5.5% (*at the time of this writing).
This means that the person you are trying to sell your home to has to come up with $70,000 down payment, and their principal and interest payment would be $1590… again, add on another $150 minimum per month for taxes and insurance and the new buyer has a payment of $1740. Not including any HOA fees or anything of that nature.
The difference between the 3.5% interest rate, and the 5.5% interest on their mortgage may not seem like much, but it is $333 per month on a $350,000 home on a 30 year, fixed rate conventional mortgage.
How This Affects You (And My Dentist)
While it is true, my dentist may not have to sell his home; you may not either.
You may be fortunate enough that your job is secure, your family intact, and your future rosy. However, what about your neighbor?
Here is a fun “Thought Exercise”
Do you have any neighbors who might (within the next 12 months) have any of the following happen to them?
Lose their job?
Get a divorce?
Job transfer?
A significant health issue?
These are but a few of the possible things that could happen to any one of the neighbors of my dentist friend. While he may not have to sell, if any of his neighbors have any of these problems , that could pose a significant “value issue” for their property.
When The Neighbor HAS To Sell
If my dentist (who paid cash for his home) paid cash for his home, all’s well and good provided that none of his neighbors have the least calamity. However, if any of them DO have to sell, it now will affect my dentist friend…
Or possibly you.
If his neighbor has to sell as interest rates continue to rise, there are fewer and fewer buyers available in the “pool of buyers.” Additionally, the ones that are available are not going to be able to afford the price your neighbor will have to sell his home for.
In other words, your neighbor will more than likely take a loss when selling in these conditions.
If the “neighbor next door” has to sell his property for less than he owes, an entire series of ugly situations become immediately relevant. Even if he sells for what he owes, if it is less than what my dentist friend paid for his comparable house; there will be problems.
The specter of short sales and REO Foreclosures aren’t that distant in our past.
“But The Media Said!”
Can we all just grow up? Please?
Wasn’t this the very same media who said that in 2008 all losses would be “contained in the subprime market”? Isn’t this the SAME media who assures us “this time isn’t like 2008?” Yet time and time, and TIME again, we find ourselves being led astray financially by those who have a vested interest in being deceptive about what financial decisions we make.
This time however, it appears that Americans are wising up to the actions of the Federal Reserve, the out of control spending by the Government, and realizing that we are only beginning to see the slowdown coming as evidenced in a recent CNBC Interview.
Home Sale Cancellations At 15%
Selling A Tucson Home
So ultimately, what happens in a situation like this? The current majority opinion says that even if there is a downturn, it won’t be as bad as 2008. They say that “people have enough equity” and “this isn’t like 2008 because most of the people have good credit”.
All of those factors may be true. However, what is a homeowner to do when they have to compete with a shrinking buyer pool who cannot pay the inflated prices with loans at rising interest rates?
If a Buyer cannot afford the difference in monthly payments, and there are fewer and fewer Buyers, the typical “first step” is price reductions…. and as the price reductions begin, it is a “race to the bottom” where nobody “wins.”
In upcoming blogposts, I will share with you some tactics and techniques that are hard learned in a recessionary environment. Things that will help you sell your home quickly, and for the most money possible.
If you have any questions, or would like a no obligation review of your situation, feel free to fill out the form below, or text me directly at (520) 403-6227!