What You Don’t Know About Home Prices Might Hurt You

Expect A Jagged Price Line

If you’ve been paying attention, home prices are falling. Some viewers on our YouTube Channel have stated they expect home prices to fall 50%, yet most expect something more in the range of 5% to 20%. This leads us to my first point.

Graph of median home price in Tallahassee October 2022

In the graph above, the blue line plots the median new home price, the yellow line plots the median existing-home price, and the red line plots the overall median home price. The yellow line shows that the median existing-home price had been falling in Tallahassee. That’s enough information for most news agencies and amateurs on YouTube to announce as news. But isn’t it worth mentioning that we’ve seen the same thing happen every year since 2004?

The median home price does not move in a smooth, straight line. Instead, it moves in a jagged line where we observe it rising and falling at different times each year. When we look at the median home price, it is a jagged line with both increases and decreases throughout the year. In 83% of the past 100 years, US home prices have increased for the year, though each year had counter-trends recorded too. The overall trend for this year is up; I believe it is premature to announce a decline in home prices until we see a year-over-year median price decline (the median home price in Tallahassee is still up more than 10% over last September).

A HUGE Point Nobody Ever Mentions

Now that you understand that prices do not move in a straight line, we can address a point that is never mentioned in the media. When mortgage interest rates rise and fall, it has little impact on demand. But when mortgage interest rates make a significant and sudden move, there is an immediate impact felt in the housing market.

If rates fall significantly, we see a feeding frenzy among buyers. Everybody wants to get some of that “cheap money,” before it is gone. This was the case from mid-2020 through 2021. When rates rise significantly, like we are seeing today, it causes sticker shock for buyers currently in the market to buy a home. Here’s how that looks:

Say a buyer went to a mortgage lender in December and qualified at a rate of 3.2% for a home loan with a payment of $2,000 monthly. Perhaps that buyer decided to wait until after May to buy a home (a common decision among families with school-aged children). In June, that same buyer was now offered a 6.1% mortgage interest rate. The impact (shock) of these different rates are:

  • The buyer could afford a $490,000 home in December. Today, that home costs $540,000.
  • Today, the buyer qualifies to buy a $330,000 home (which was worth $295,000 in December).
  • The buyer’s $2,000 monthly payment has dropped 40% in buying power since December.

Are you surprised that many buyers are in shock and have left the market? That is a very real scenario.

So, buyers today are spending less money due to mortgage interest rates soaring higher. Is it any wonder that the median home price is falling? Buyers have less money to spend. Non-discretionary buyers do not have the luxury of “doing nothing.” I get comments all the time on our YouTube Channel where people say that people who buy today are stupid. When I see these comments, I wonder if they come from people who live in their parent’s basement!

Some people have to move. Job changes, life changes, devastation (Central Florida). Unless you are willing to be homeless, you have to choose between buying or renting when you need a new place to stay. Both rents and home prices are soaring, so neither is a good option. But some people have to move, and I recommend they make an informed decision.

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