Experts are expecting three interest rates hikes in 2022 by the Fed. This is in addition to tapering of bond purchases which should end in the 2nd quarter of 2022 if not sooner. What this means is borrowing costs for consumers is going to go up in 2022. A 1% rise in interest rates equates into a11% decrease in purchasing power for buyers.
How will this decrease in purchasing power affect the local SW Florida real estate market? In the old days we would say it would directly impact the market. Today we say it is an influence. Market forces affect the market and tried and true economic indicators are not as significant as they once were.
Law of Supply and Demand
The law of supply and demand is still applicable. It is called a law for a reason, because it is always true. Yes, rising interest rates can taper demand from home buyers that are financing. What it cannot predict is how many homebuyers will be in the area looking, and how financially stable they are.
For instance, we could see an influx of higher end home buyers seeking to purchase with a mortgage. If we have enough of them, the demand can still outpace supply, even if some home buyers qualify for less. Secondly, we must not forget about cash buyers who are less affected by interest rates. I say less affected because they may be affected by homebuyers purchasing another property they may own to generate the cash.
Last year home prices took off in October. The average sales price rose 4.72% in one month from September 2020 to October 2020. The median price rose 3.09% last year in October. This October the average price rose 5.16% over September and the median rose 3.30% Both 2021 measures eclipsed what we saw in 2020.
What is different about 2021 is that we have a decrease in inventory supply of 39.3% heading into these months. In October 2021 we had 1,770 single family homes on the market compared to 2,918 last year.
Three Interest Rate Kikes Expected in 2022
On the one hand we should see rising interest rates that would suggest a moderating of home prices. On the other hand, demand for homes in Florida has never been greater and more people are moving here than ever before. Which market force will outduel the other? The logic seems to think increasing demand will win out.
Who loses in this market? First-time homebuyers will face significant obstacles. Already many are being outbid by buyers paying cash or putting significant down payments into the deal. Rising rates will only exacerbate their situation. People on fixed income or salaried workers without extra cash down payments will be hurt as well. They will have a hard time competing against buyers coming into the state with more money to spend.
Inflation will hurt the average homebuyer as well. They may see a 3% raise all the while everyday costs are going up 6-10%. This is before factoring in a 11% decrease in purchasing power from rising interest rates. The real estate market may survive and thrive, but pain can be felt from those left out of the process.
Rents have gone through the roof, so the cost of living is definitely higher regardless of whether people purchase or rent. I truly believe buyers should buy now, even if the home is not their dream home. It will protect them against rising rents and inflation. As cost of materials to build go up, owning a home can be a hedge against inflation and protect homeowners. The non-perfect home you buy today may be the steppingstone for your next home in the future.
We have a team of experts that can help you find your dream home or steppingstone home now to avoid the costly interest rate hikes coming next year. Call us at 239-489-4042 or visit www.LeeCountyOnline.com. If you are interested in selling, call Sande or Brett Ellis at 239-310-6500 or visit www.SWFLhomevalues.com