In “too hot for too long” cities like Denver, Seattle, San Francisco and Los Angeles, markets have already begun to lose momentum. Rising interest rates have cut buyer demand.

Time frames are changing…eventually is no longer eventually, eventually is now. Real estate’s law of gravity is beginning to kick in and sellers’ price expectations are being revised.

Aaron Terrazas, Zillow’s director of economic research, said, “I don’t think higher mortgage rates will deter anyone who has already made a decision to buy, but, it will push them to sit on the market longer, waiting for a ‘right priced’ home…we’re now six years into this above-trend home price growth and mathematically, it can’t go on forever.”

Underlying affordability problems were essentially unmasked by 2018’s +1 percentage point jump in rates to almost 5% for a 30-year loan. This +1% point rise rendered an additional cost blow to some buyers who were already stretched to their limits.

Just look at the results of that over stretching in expensive markets:

  • In September 2018, sales of existing homes in Southern California fell 18% from September 2017.
  • Sales plunged 19% in San Francisco to the weakest rate of sales since 2007.

Chief economist with the National Association of REALTORS® (NAR) Lawrence Yun anticipates that interest rates will hit 5.5% next year. Experts at Zillow estimate that 5.5% interest rates would add 9.4% to the overall cost of a home purchase, assuming no additional changes in the purchase price.

Under this 5.5% interest rate scenario, sellers would obviously have a smaller pool of buyers. In Boston right now, only 52% of all listings are affordable to a buyer earning a median local income. At 5.5%, only 46% of all listings would be affordable to that buyer.

In San Francisco currently, only 27% of all listings are affordable to buyers earning a median local income. An increase to 5.5% in rates would pare down that 27% affordability to just 21% of buyers earning a median local income.

Yun thinks that continued job growth and rising wages could mitigate costlier mortgages but he expects 2019 home price growth to slow but “…remain positive at 2 – 3% nationally.”

NAR’s Home Affordability Index is already down to its lowest levels in 10 years and the University of Michigan’s monthly consumer sentiment survey is already down to its worst reading since 2008, Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, said, “This home price downturn raises the risk of a generalized asset price deflation that could result in a negative wealth effect for the first time since the financial crisis.”

Yun concluded by saying, “There are always winners and losers when prices move down.”

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