For the first time in 20 years, 30-year fixed rates hit 7%
The last time 30-yr fixed mortgages were at 7%, the world was very different place:
- Gas was $1.36/gallon
- “Friends” was still on TV
- The iPod was Apple’s latest gizmo
- Tom Brady won his 1st Super Bowl
But what’s also drastically different compared to 2002 is our real estate market. 20 years ago, the median price for a Sacramento home was $187,000. That was relatively affordable even with rates at 7%. Today with rates at 7%; not so much. Let’s compare the then & now numbers.
Today, home values are almost 200% higher than they were 20 years ago while income is only marginally up 62% higher. All that translates to is instead of 34% of a household income going to a mortgage payment, it is now standing at an unsustainable 57%. Something has to give.
Let’s compare this percentage of income to what the market was at the last peak of the real estate cycle in 2005.
Home values were less & annual income was less but as a percentage, today’s household’s monthly income going towards a mortgage payment is higher than the levels in in 2005. That is a very troubling statistic. Something is going to break. Something has to change from these 2022 numbers. They are not sustainable. 1 of 2 things is going to happen: home prices have to come down or interest rates have to come down. Let me show you by how much.
How about a middle-of-the-road number of 45% as an acceptable mortgage payment-to-income ratio. To get to that number, home values need come down to $420K in Sacramento County. That’s a 21% drop from where they are right now. Keep in mind from 2005 to 2011, home values in Sacramento County decreased by more than 50%. To have a 21% correction, its not quite as deep of a crash as what we saw, but its very certainly possible to see them come down quite a bit if interest rates stay at these elevated levels at 7%.
Now, if interest rates come down then affordability is obviously aided by paying less in interest & you can pay more for a house. For home prices to remain at their current levels, 30-yr rates will need to fall down to 4% to get that percentage of income to acceptable 44-45% range.
Which is going to happen? I don’t know. We’re going to have to see as we go into Q4 here and see what happens with inflation. See what happens with buyer demand. There’s so many factors that go into impacting the health of the real estate market. But in the present moment right now with prices where they are at, with interest rates where they are at, we are at an unhealthy level.
If I had to guess, its going to be a combination of both prices and interest rates falling in the next 3-6 months for us to find a little bit more of a healthy footing for our real estate market. I know I just showed you Sacramento numbers, but this is an issue statewide and, arguably, nationwide.
What do you think, though? I’d love to see some comments down below. Tell me what your forecast is & we’ll all be on the edge of our seats here as we go into Q4 of 2022. As always, I appreciate you taking the time to watch my videos & read my posts.
Look out for more. I’ll keep you updated with market analysis here at MattsMemos.com.
Thanks again!
Matt Sundermier's Memos on Real Estate & on Life 
Matt. Great Analysis. Logical and simple to follow. Agree! Thanks, Matt
Thanks Chris. Good to know a smart guy like you agrees!!! Did you go to the Oktoberfest event this weekend? I was on campus for mass and saw the festivities.
Hi Matt, Yep. I was on clean up duty for Oktoberfest! I think another interesting way to consider home prices is the correlation between home prices and rental rates. Home prices should stay high if rents remain high…right? Like home prices, area rents have come up significantly, too. As home prices rise, affordability declines incenting more people to rent, driving up rental rates. On the way down, do you see rents as a leading or lagging indicator?
Since I don’t actively practice in the property management field I do not see the “front lines” activity of rental rates, but my hunch is they are not being propped up simply due to higher mortgage rates and home buying unaffordability.
Presently, nationwide single family home building “starts” are DOWN 15% year-over-year while multi-family building (ie-apartments) starts are UP 15%. In other words, builders are bringing more relative rental units to market than units for purchase. Granted these are nationwide numbers, but all it takes is a drive down E Bidwell to see the large number of apartment units being built locally to support this macro trend!
Due to the difference in the supply changes of these two products, we may see an inconsistent change in their prices in the market. Its conceivable we will see housing prices fall (due to decreased demand) and rental rates fall (due to increased supply).
A further step down the rabbit hole would consider migration trends (we all know someone who recently moved out of state), generational housing (older family members moving in with younger ones & visa versa), and homelessness (its a small piece of the housing pie, but there are more folks than ever not purchasing any form of housing) and how they could impact housing demand in the near future.
Happy to geek out more on this stuff with ya. Want to go grab a pint?
Great video and analysis of taking a complex issue and explaining it in an easy to follow presentation.