January 23, 2015

Low Interest Rates Contribute to Keeping Real Estate a Sellers’ Market

The Sellers' Market in Real Estate

A seller's market in real estate is one where the number of buyers -- those seeking to purchase homes -- exceeds the total quantity of homes for sale.  When demand for homes is greater than the available supply, homes will be priced higher, increasing their value to the sellers in the market.

Current conditions -- a slowly improving economy, lower housing inventory and low interest rates -- have added significantly to buyer demand in most markets.  Home prices have risen in proportion to diminished supply, created a sellers' market in the U.S. 


The Impact of Low Interest Rates on Home Prices

Low interest rates on mortgages attract first-time home-buyers.  A locked-down low-rate mortgage between 3.5%-4% is attractive to new home-buyers, because they generate low interest payments on the mortgage principle well into the future.  So long as the economy does not undergo substantial changes, expectations are that these rates should remain consistent through 2014.  Buying a home under these conditions is a good investment. 

However, at the same time and perhaps more to the point, these circumstances also favor sellers -- home-owners, builders and banks -- who can get more for their home products.  Low interest rates allow them to increase home prices, without bringing the total cost beyond most buyers' financial resources.  Rising prices for buyers as inventory has dwindled have also contributed to the sellers' market.

At the same time, buyers should be aware of rising costs attached to securing mortgage loans, in the form of increased federal mortgage insurance premiums, to as high as 2.5% annually.  Under these circumstances, a $200,000.00 home purchase would experience an increase of $133.00-per-month on mortgage loan payments, somewhat decreasing the positive effect of lower interest rates. 

Yet, as recently as August 22, interest on mortgage loans had decreased to all-year (2014) lows.  In addition to low 30-year fixed-rate interest (3.5%), 15-year fixed-rate loans were offered for 2.75%, sustaining their impact of the current sellers' market on home prices.  These conditions have also defied forecasts that mortgage loan rates would increase to over 5% before the end of this year.

Nevertheless, at the present time, low interest rates makes home loans cheaper for buyers.  The sellers' market also encourages bankers to make mortgages easier for buyers to acquire.
Less Affordable Homes
At present, lower interest rates combine with low housing inventory and modestly rising home-prices to create a sellers' market.  Higher home prices means they are less affordable to the typical buyer.  In addition, private income has remained flat in real-terms -- what your money can buy -- for years.  These conditions
  • largely offset the savings buyers could expect from lower interest on their mortgage loans,
  • a situation that might become more expensive for buyers should interest rates rise,
  • because even fewer potential home-purchasers will be in a financial position to afford the increases in both home-cost and higher loan interest.   

The combination of low wage-growth and low overall housing inventory have slowed home sales in the present sellers' market.  Even recent increases in available homes for sale has done little to improve actual sale-conditions, despite low interest on mortgage loans.

These conditions persist despite continued very favorable interest rates on mortgage loans, when viewed from a historical perspective.  But while it is largely a sellers' market, people selling their houses should not make the mistake of over-pricing them.  Buyers will look elsewhere, causing the seller to.
  • wait for a prolonged period (even years) to make the sale,
  • often at a lower price,
  • more attendant to the residence's actual market value.  

Thus, the current market represents a mixed blessing for sellers.  They can get more for their homes when sold, but with fewer homes currently being purchased, the wait-to-sell can be much longer than anticipated.  Sale-prices are generally increasing but fewer homes are actually being sold, as indicated by a 10% decline from May 2013 through May of this year (2014).  In the same vein, price-per-square-foot has increased 8% during that time span, but the number of houses sold above-suggested-list-price has declined by 7%.    These figures suggest that conditions in the present sellers' market have caused home sales to decline.

A Seller's Market for Home Owners as Well

For people who already own homes, low interest rates on home mortgages represent a dis-incentive to sell.  Rates locked-down at 3.5%-4% for 30 years are as attractive to current homeowners as they are to new buyers, and for similar reasons - they offer home owners low payments on their mortgage principle, making homes a good investment.  Under such conditions:

•    it usually takes an offer well above the home's listed market value to convince owners to sell,   
•    establishing and maintaining a seller's market for home owners. 

And, if interest rates rise, they're more likely to stay put as well, because any new home they buy will have those higher rates attached to their mortgages.  Thus, it makes sense for current home owners to wait for an exceptional price for their property before they consider selling.  These conditions may only prolong the sellers' market, even if housing prices come down somewhat to reflect marketplace realities.

Buyers' Expectations

Despite higher-price-per-home, low interest rates favor buyers.  Mortgage loans remain low-cost and easy to obtain.  Home price-growth is currently decreasing as inventory slowly rises.  It may be that low rates will encourage renewed growth in home-buying, lowering prices as competition for sales increases, bringing the sellers' market to an end. 

Jonathan Ensey is a Senior Partner at GoThink!, a retail marketing and business consulting company, and the Managing Director of ARedStore.com,  a website dedicated to providing real estate marketing collateral and services to Keller Williams real estate agents.