Lower Interest Rate? Who Cares?

Everyone is talking about interest rates and how a drop will bring more buyers back into the real estate market.  There was a kerfuffle last week because we saw rates drop to the mid-6%. I say, whoop-de-doo, who cares?

On Saturday HousingWire wrote an article, “Have Lower Interest Rates Boosted Housing Demand Yet?”  I fundamentally disagree with the premise of the question, which assumes interest rates have been the primary factor slowing demand.  In my experience rates are the first thing to pique the interest of potential buyers, however, what has driven buyers out of the market hasn’t been interest rates, but affordability.

Economists talk about inflation being at only 2%.  Yeah, ok.  The rate has indeed slowed to a very manageable 2%.  However, it does not mean that prices have gone down from the complete inflation disaster, which peaked in June of 2022 at a whopping 9.1%. A quick glance at the Consumer Price Index (CPI) tells the tale of exponential price increases, which has been devastating for working-class buyers whose wages have not kept up with increasing prices of everything, including homes.

In the years preceding COVID, the rate of median home prices was manageable.  The US Bureau of Labor Statistics (BLS) shows, from 2014 to 2019 the total change was a 12% increase.  In the same time frame, median wages outpaced home prices at 15.93%.  This healthy market allowed potential buyers to feel secure that they could make the leap into home ownership.  As a contrast since 2019, the median home price has catapulted to 31%, while wages have only increased 24.21%.

To illustrate this point, we can look at the rate of increase of median home prices and median income in the last decade.  In 2013 a buyer could pick up a home for a median price of $266,225, which would be a $1,596 mortgage payment at a hypothetical 6% interest rate (no tax, PMI or insurance.)  Right before the pandemic, and its resulting insane home price surge, a buyer could still find the median home for a monthly payment of $1,920. Today, the median price has skyrocketed to $419,550, which would be a monthly payment of $2,515 at that same 6%. A full percentage point drop to 5% would only drop that payment to $2,252.  Do we really think that $300 is keeping buyers out of the market? 

First-time buyers certainly have been affected differently than move-up buyers.  Those homeowners who’d like to make a change are in a completely different boat, and have benefitted from the price increases.  They can take the earned equity and transfer it to a new property.  So, who loses?  Just the largest home-buying group – the millennials.

My Take

It’s going to take more than a slight drop in interest rates to get first-time buyers back in the market.  We need to see a rise in wages to make a $2,500 mortgage payment more feasible for most consumers, or a market correction.  Consider too, it’s not only housing prices that have increased; it’s all goods and services, which has had a catastrophic impact on many Americans.