Navigating Rising Interest Rates
& Decreasing Affordability

In September, the Fed made its fifth interest rate increase in 2022 in order to combat rapidly growing inflation. The last three consecutive rate hikes this year have been by an increase of 75 basis points (0.75%)—an amount not seen since 1994 (which only saw this amount of increase once...along with multiple smaller hikes during that year).

In the real estate industry, we're quickly seeing the effects of these increases—longer days on market, more price reductions by sellers, and an increase in buyer incentives from builders (and some private sellers). In other words: Slowly returning to the days before the market rush of the past 3 years.

PERSPECTIVE

First, let's put things in perspective. Yes, 2022's rate increases have been dramatic, but considering the incredibly cheap 2.5% rates we're coming from of the past few years, current mid-6% rates were the norm around 2008, and FAR lower than the rates before 2000. Money has never been cheaper than in the past decade, but it's been a welcome anomaly rather than a norm. If you were able to take advantage of these rates, you got a great deal! But conversely, current rates aren't cause for panic if you're still looking to purchase a home.

AFFORDABILITY

On the other hand, home affordability in Oklahoma has been declining since 2017. Sellers enjoyed skyrocketing appreciation allowing them to list their homes for above average returns. And corporate investors with large cash reserves made many sellers happy with their willingness to buy up homes with little regard to increased prices.

Today's higher interest rates means new sellers may need to return to more "typical" initial asking prices, as higher prices risk pricing out potential buyers who are struggling with increasing rates that lower their pre-approval affordability. Many REALTORS® are returning to having conversations with their sellers about price reductions after their homes have been on the market for too long (something that hadn't been an issue for awhile!).

Sellers shouldn't panic, though. This doesn't mean homes are losing value. Most experts agree that home values will continue to appreciate; just at a slower rate (around +2.5% on average nationally) than the unsustainable increases of the past two years (+16% on average nationally).

BUYER STRATEGIES

Search Smart—More and more new construction home builders are offering buyer incentives, and price reductions are becoming more common in order to keep prices affordable in response to increased borrowing costs. Use the filters on your Flotilla partner's website to search for homes with price reductions and homes with "incentive" in the description!

ARM Loans—Weokie Federal Credit Union offers a 5/5 30-year ARM loan. This allows buyers to lock in an interest rate today as low as 5.65% for the first 5 years of their loan, then readjusts every 5 years thereafter. The maximum increase at each 5 year adjustment is limited to 2%. If rates decrease during the length of your loan, you can qualify for a lower rate at each adjustment period. ARM loans are often best for buyers expecting to own a home for less than 10 years.

Seller Paid Points (Rate Reduction)—Keith Ferguson, a Loan Officer with AMC Mortgage, educates buyers on a seller paid points strategy. Instead of a buyer making a lower offer price on a home purchase (for example, offering $295K on a home listed at $300K), a better strategy over time is to ask the seller to pay down the buyer’s interest points—lowering their interest rate.

This strategy can drastically lower monthly payments, and result in greater increased savings over time versus a lower purchase price. Seller paid points is typically a better option if you plan on keeping your home for the full-length of your loan.

Each option has its own advantages & disadvantages. If you're buying a home, consult with your Flotilla partner to determine which strategies work best for your situation!

WHY FLOTILLA?

Each month, we meet to share strategies for continuing to get deals closed for our buyers & sellers in this changing market. Our Core Partners and Broker Associates have both decades of individual experience and over a century of combined experience.

We've been through market ups and downs time and again. Not only are we experienced with past proven strategies in navigating shifting markets, but we also collaborate & share with our industry partners to utilize new ones!