A look into the current real estate market and changing interest rates
There has been a lot of change in the real estate market over the past couple of years. With raised interest rates, economic insecurity, and declining house prices, many potential buyers and sellers are feeling “stuck”. In addition, the media has portrayed a pretty grim picture of what it can mean for homeowners. In turn, this negatively influenced the market and consumer confidence. It’s easy to get caught up in the headlines about the “crash” and whether or not we have bottomed out. James and Rebecca shed some light on their thoughts and what it truly means to trade real estate in 2023.
First and foremost, let’s talk about interest rates and prices. At the end of the day, keep in mind you are marrying the home you want to live in and the price you pay to purchase it. The interest rate is simply part of the dating process.
In the GTA, on average, we have seen a decline in house prices of approximately 20% since the highs of 2021 and early 2022. The bubble was large. Homes were selling at all-time highs and in record time. Accompanied by record-low interest rates, the market was extremely fast-moving, and impossible to sustain.
The reality of it is the market couldn’t keep appreciating at the rate that we had seen over the past 2.5 years.
We saw unprecedented growth in demand and price escalations, leading to unhealthy processes of purchase. Most financial institutions and regulators prioritized profit over their influence on lending practices.
The qualification standards that previously existed to protect the integrity of the industry essentially went out the window. Almost anyone could qualify for a mortgage and even the appraisal process was weak with most of them being completed as a mere “drive by”.
In the current market, we are seeing banks and lenders reverting back to those higher standards and sticking to them. This is putting more pressure on buyers and their ability to purchase. If they can’t qualify for the mortgages they could previously, the amount they are able to spend is lower.
Combine that with the higher interest rates we have experienced over the past year, the house prices are forced to decrease and consumer confidence is affected.
The entire market shifts to accommodate this new reality and will continue to fluctuate based on rate changes. Small rate changes sometimes can weather the storm and the market can still be normalized without a change in buyer or seller expectations. However, when there are drastic changes (as we have seen in the last year) it affects everyone.
“Don’t wait to buy real estate. Buy real estate and wait”
Our society is more tied to rate than we talk about. There are a few outliers that can use cash for their transactions. But the majority of the public in any segment of real estate (homeowners, investors, flippers, commercial, etc…) use leverage and borrow to finance their home purchases. This leads them to be at the mercy of lending guidelines and rate changes.
We have seen some major segments of real estate hit harder than others, due to, not only, the rate changes but also a shift in needs after the lockdowns. When we were experiencing the lockdowns, many people entered a remote working environment and were able to work from home. Over the last few months, we have seen companies reversing that trend, calling their employees back into the office. This has caused many who moved out of the city to reconsider their choice and move back closer to transit hubs, or the physical office itself.
This change in rural interest has hit some of the smaller communities a bit harder during the downturn we have seen over the last year. Homes are generally staying on the market longer and selling at a substantial discount compared to homes with a more urban setting. This of course is not true of every area, as there are some very desirable rural locations, but it’s something that has been trending in the last few months.
Another observation in more recent sales is a shift in buyers’ willingness to renovate. Homes that need updating are sitting much longer than those that are move-in ready, even when the price of renovations has been factored into the list price.
When buyers aren’t confident that the market will be rising, they are less willing to take on new projects to build equity into their homes. They would rather save the cash they have on hand for a rainy day.
This rings true as well for flippers. When taking into account the price of materials, the numbers aren’t making sense for them. This is causing many to sit on the sidelines, waiting for signs the market will improve before they jump into their next project.
Now, we are starting to see the balance return. With the latest rate announcement, buyer confidence is on the rise and in certain cases there are multiple offers on properties.
As interest rates stabilize, it will increase the affordability of the buyer market. This will help home prices begin to rise again. Will we go back to the highs of 2021 and early 2022? Likely not, but we will see home appreciation return to a healthy and sustainable rate.
At the end of the day, the timing is right, when it’s right for you. There is no crystal ball, but the old saying, “Don’t wait to buy real estate, buy real estate and wait”, couldn’t be more relevant than it is right now. Buying a home at a lower price point and a higher interest rate doesn’t have to be scary.
When the rates begin to lower, you can refinance. Your down payment will be lower. You’ll have snagged your perfect property at a price that will allow for growth and appreciation in the coming years.
If you have questions that pertain to your specific situation or home buying-selling plans, as always, reach out to our team. We are happy to break it down and help you set real estate goals that work on your terms.