By Nancy Perkins
With stories of record-breaking inflation, potential recession, rising interest rates and escalating home prices dominating the news, it is easy to understand why many home buyers are nervous about purchasing a home now. Prospective home buyers were already exhausted by the real estate market of the last few years with its record prices, bidding wars and historically low inventory. If a buyer didn’t already purchase a home, should he or she still purchase now?
Mortgage interest rates on 30-year conventional loans have nearly doubled in recent months, surpassing 6% last week and shocking many prospective home buyers. However, such rate increases should be kept in historical perspective. According to Freddie Mac, since 1980, mortgage interest rates on 30- year conventional loans have fallen from a high of 16%. By comparison, a 6% mortgage interest rate is still very good.
Most analysts agree we are unlikely to see 3% rates anytime in the future. If buyers can afford to buy now, they would be wise to do so before rates go up further, knowing that if rates drop, they can always refinance.
That said, rising rates impact affordability. As a general rule, a 1% rise in interest rates results in a 10% decrease in purchase power. Buyers need to scale their expectations in line with their new budgets or talk with lenders about other mortgage options, such as adjustable-rate mortgages.
With inflation hitting record levels and a 20% decline in the stock market, many home buyers are understandably worried about a possible recession. However, according to the Center for Regional Analysis at George Mason University, federal spending in the metropolitan Washington area has been steadily rising from $55.5 billion in 2013 to more than $90 billion in 2021, and there is little reason to think that will change any time soon. Historically, increases in federal spending offset decreases in private spending in our market in recessionary times.
Even in the private sector, we see signs of optimism. The Professional and Business Services Sector makes up 24% of the region’s employment and has added more than 12,000 jobs in the last year, surpassing its pre-pandemic levels, according to the GMU Center for Regional Analysis. This sector is the primary sector buying homes in our region.
Finally, it is worth mentioning in four of the last six recessions nationwide, home prices have risen, not fallen, according to KeepingCurrentMatters.com. The primary exception is the recession of 2009 that was largely caused by the housing market. Assuming buyers have stable employment, purchasing a home now is likely less expensive than purchasing one in the future, even if there is a recession.
Investments in real estate can be a powerful hedge during periods of high inflation. The Consumer Price Index, which measures inflation on the consumer level, recently rose to its highest level in 41 years. Gas is more than $5 per gallon. Food prices are up more than 10% from last year. The stock market is erratic.
Real estate appeals to investors looking for a hedge against inflation, as it provides an opportunity to invest in an asset that traditionally holds or grows in value. In most decades since 1970, home price appreciation has outperformed inflation. Investors are especially interested in the residential real estate market where supply is tight. Corelogic forecasts that home prices will appreciate 5.6% in the year going forward nationally. The Home Price Expectations Survey, published by Zillow and Pulsenomics for the second quarter of this year, states that home prices will appreciate more than 26% through 2026, even with the anticipation of a recession in 2023-2024.
As the white hot market of 2021 begins to wane, buyers would be wise to invest their funds in residential real estate to utilize inflation to their advantage, build equity before home prices go up further and leverage their funds at the current interest rates.
The writer is an award-winning Realtor and a lifelong Alexandrian who is proud to work, play and raise her family in the town where she grew up. To learn more, visit NancyPerkins.ttrsir.com.