The natural law of economics tells us that supply and demand will determine the price, but there are limits as to what a buyer can afford. Home affordability dictates prices in the real estate market. Individually one buyer may pay out of the norm for an item or house, but in the macro the market determines the overall value.
On average about 20.3% of a homeowner’s income goes to cost (principal, interest, taxes, and insurance) of owning a home. In 2021 that number was down to 16 which tells us there is room for growth in prices.
Rising Headwinds
This is the point in the party where the music stops, or at least skips a beat. Three out of the four items that affect affordability are rising. Principal is going up because more people are paying more for housing, so they are borrowing more. Interest is rising and expected to climb much higher. Insurance is rising too as many insurers are pulling out of Florida and they are raising rates. The only thing not going up today is tax rates, but then again property taxes go up as the value increases.
If 3 out of 4 factors go up, there is a limit to how far each one goes up before people stop buying because they cannot afford anymore. I would argue that rising interest and insurance costs are one day going to zap the upward pricing pressure right out of the market. The question is when?
Interest rates fell from 4.46% in 2018 down to 2.74% in January 2021. Since January 2021 rates have stayed low until this January where we’ve seen rates march higher. Today rates are back up over 4% and going higher. We have seen a runup in prices since those rates began to decline.
Real Estate Price Driver
In October of 2018 the median price of a home was $246,995 and the average was $327,081. In February 2022 the median was $410,000 and the average was $569,697. That is a 66% increase in median prices 39 months, and a 74.18% in average price. This was possible due to interest rates declining like they did.
Today is the opposite. Rates are going up quickly, and on top of rising rates we have rampant inflation also eating away at buyers’ income. Add to that rising insurance costs and we’ve got a recipe for home affordability rising. Can the line go above 20.3%? Sure it can, and it has before. Each time it has it was followed by pressure on prices. Home affordability dictates prices, so we keep an eye on that going forward.
There is a limit to what people can afford. We are graced here in Florida that more people are moving here. This is helping with demand. What happens when rising rates affect their ability to sell their homes up North? Will they be flush with cash like they have been the past few years? You see, these same economic forces work up North too, and when they are affected, it can eventually affect us down here.
We Have a Great Market
Nobody is saying the sky is falling or prices are going to decline anytime soon. In fact, many experts predict a 9% rise in home prices in 2022. Experts sometimes get it right, but they rarely get the timing exact.
If you are a seller and your home isn’t working for you like it once was, you might consider taking advantage of this opportunity.
The Ellis Team marketing is still generating multiple offers and Top Dollar. We do things a bit differently than most Realtors and we’ll be glad to show you how we do it. It is more fun to sell when you have multiple offers to choose from. What if one day in the future you don’t? Remember the days when sellers would be glad to just get one offer?
If you are wondering what your equity position is, we should talk. It is wise to review your equity position and determine if this asset still works for you. Brett or Sande will be glad to help. Call us at 239-310-6500 for or visit www.SWFLhomevalues.com for an instant and Free online home valuation.
Good luck, and we’ll keep an eye on the market for you!
Where are Real Estate Prices Headed?
See Last Week’s Article “Housing Market Priced Correctly in SW Florida?“