Housing will become more unaffordable as homes continue to rapidly appreciate and mortgage rates rise.



Ask any buyer what it is like attempting to purchase a home in today’s housing market and the responses will be same. It is frustrating, overwhelming, exhausting, and disheartening. 


While it may be discouraging for buyers to continue the pursuit in purchasing a home, diving into the consequences of waiting will keep them motivated. It is important to focus on the monthly payment in purchasing a home today and compare it to delaying until the end of the year. An $875,000 home purchased today with a 20% down payment yields a monthly payment of $2,999 at the current interest rate of 3.125%.



With a record low supply of available homes to purchase paired with unstoppable demand powered by historically low mortgage rates, home values are anticipated to continue to increase at a pace of about 1% per month through the end of the year. That equates to a home appreciation of 8% from now through December. At the same time, the United States economy is revving its massive engine now that it is emerging from the depths of the pandemic. Excellent job reports, increased travel, a massive personal savings surplus, and a return to some semblance of normal life again will ignite the economy and translate to a rise in mortgage interest rates. It is already occurring. According to Freddie Mac’s Primary Mortgage Market Survey®, rates started the year at 2.65%, an all-time record low, and have since risen to 3.125%. That is nearly a half a point higher in just a few months. By year’s end, rates are forecasted to hit 3.75% or higher. 


That means that the $875,000 home example above will appreciate to $945,000 in December. Match that up with the expected 3.75% mortgage rate, and the monthly payment blossoms from $2,999 to $3,501 per month, an increase of $502 every single month for the life of the loan. That is $6,024 per year or $30,120 in five years. This example only factors the increase in the principal and interest payment. The 20% down payment for $945,000 is an extra $14,000 down. Property taxes go up too. With the average tax rate of 1.1%, that amounts to an additional $770 annually. 


In the end, it all adds up to a lot more out of pocket expense on waiting until the end of the year to pull the trigger on a purchase. There is a definite cost to waiting even though the current market is extremely frustrating from a buyer’s perspective. There is a higher monthly mortgage payment. Down payments are larger. Property taxes are higher. 


There are some who believe that when rates rise to 3.75% that the housing market will reverse course and become a buyer’s market. There are plenty of YouTube videos that promote this explaining that a 1% rise in rates translates to a 10% drop in prices. Yet, that did not occur in 2013 when rates rose from 3.34% in January to 4.5% in July. It did not occur in 2018 when rates rose from 3.95% in January to 4.94% in November. Home prices did not fall. These theories are not rooted in fact. Instead, they are click bate for views, after all, that is how YouTubers are paid. 

It is better to look at supply and demand. While demand will decrease when rates rise to 3.75% or 4%, it will not shut off demand completely. The current number of available homes to purchase is at a record low 2,240. The five-year average (from 2015 to 2019 and intentionally excluding 2020 as the numbers were skewed due to the pandemic) is 5,552, or 148% more. That is an extra 3,312 homes on the market. Current demand (a snapshot of the last 30-days of pending activity) is at 3,162 compared to the five-year average (2015 to 2019) of 2,796, or 18% more. That is today’s trend in housing, an ultra-low supply of available homes matched up with fiery, hot, insane demand. With rising rates, the inventory will finally rise from its unparalleled, low level, and demand will decline from its torrid pace. The result will be a market that is much more manageable to navigate, yet still a Hot Seller’s Market. Homes will still appreciate, just not at its current unparalleled pace. There will still be multiple offers, just a few generated on each property compared to the double digits of today. 



The active listing inventory in Orange County has already been at a record low level and it would be hard to imagine it dropping even further, but that is exactly what materialized. In the past two weeks, the inventory shed another 109 homes, down 5%, and now sits at 2,240. It is the lowest level since tracking began in 2004. Yet, more homes are finally entering the fray. In March, there were 19% more homes that were placed on the market compared to February. Now that spring has begun, expect more homes to come on the market from now through July, with May being the peak month. Many of these homes will be gobbled up as quickly as they come on due to the ferocious pace of demand. But that will evolve as mortgage rates climb and some buyers end their home buying search with the realization that their monthly payments are increasing too much. The inventory will rise a lot more noticeably during the Summer Market.


Comparing year over year data will not be accurate for the remainder of the year due to COVID-19 skewing the statistics last year. Taking the prior 5-year average from 2015 to 2019 is a far better comparison. During March, there were 342 fewer new FOR-SALE signs in Orange County, 9% less than that 5-year average. This trend started in January and has resulted in 611 fewer homes on the market during the first quarter of 2021, 6% less. It is due to the lack of available replacement homes that have many homeowners alarmed about selling. They are fearful that there will be “nothing to buy,” limiting the number willing to participate in a market with such an anemic level of available homes to purchase. Yet there are strategies to avoid getting burned in selling and then purchasing a replacement home. A bridge loan, a rent back, and accepting an offer contingent on finding a replacement home are a few sound strategies in navigating today’s insanely hot market.



Demand, a snapshot of the number of new pending sales over the prior month, climbed from 3,110 to 3,162 in the past couple of weeks, adding 52 pending sales, up 2%. This is the strongest start to April since 2012. Demand is surging due to mortgage rates in the low 3% range. While rates may have risen to 3.18%, its highest level since last June, if it were not for the pandemic pushing rates to historically low levels, today’s rate would still be an all-time record low. Demand will continue to be juiced until mortgage rates eclipse 3.5% and continue to head higher later this year. That will occur on the backs for great economic news on the horizon. Until then, it will be more of the same, homes that enter the fray will procure way too many offers and home values will continue to soar. 


Last year, demand was at 1,584 due to the start of the pandemic, that is 1,578 fewer pending sales compared to today, or 50% less. The 5-year average from 2015 through 2019 was at 2,796 pending sales, 366 fewer pending sales, or 12% less. 


In the past two-weeks the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) dropped from 23 to 21 days, its lowest level since tracking began in 2004, and is a very Hot Seller’s Market (less than 60 days) where there are a ton of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly. Last year the Expected Market Time was at 79 days, slower than today. The 5-year average from 2015 through 2019 was at 60 days, much slower than today, but still a Hot Seller’s Market. 


The table below gives you an idea of just how quickly a property (based on its price) will go from active on MLS to Under Contract/In Escrow today versus last year.  



These numbers are mind-blowing! Anything under 30 days is considered a red-hot seller's market - and pretty much only homes over $2million might actually sit on the market for longer than a month.  

We hear it time and time again from buyers: "Maybe I should just wait out this crazy sellers market right now". But unless you are willing to wait a few years, pay a higher purchase price than today and pay much higher interest rates, it's best that you get in the game now! And with the best team in real estate representing you, you already have a better shot of getting your offer accepted than the other buyers.

Sellers: you hold all the cards. However, many of you are concerned where to go next. That is where The Swan Team comes in.  We can develop a plan that allows you to maximize the profit from your sale, maximize your leverage as a buyer, and only move ONCE!

Contact us today at 949.444.1601 to discuss and develop a real estate plan that is right for you!