Is the market going to implode?

In the past 6-8 months, mortgage rates have nearly doubled from where they were in winter 2021. If you applied for a mortgage around holiday time last year, your interest rate would have most likely been around 3% for a 30 year conventional loan– and now the mortgage rates are approaching 6% for the exact same type of loan. Many real estate markets across the country have crossed the tipping point and are now seeing price reductions, increased inventory and apprehension from buyers. 

Here’s what the rate changes have done to affordability: 

• The increase makes your monthly payment approximately 40% higher on average. This means that if your income allowed you to borrow a maximum loan amount of $400,000 in December of 2021, now you can only afford to borrow $285,000 (all else being equal). 

• Your property is most likely not worth what it was at the beginning of the year, especially if most buyers in your market are borrowing money to buy. Most markets have seen slowdowns across the board shown in either slower growth or declines in value.

What should you do to prepare yourself for the future?

• If you feel like you’re not very financially savvy or educated, now is the time to apply at Youtube University. Many people become anxious and stressed when markets shift, but they always happen every decade or so, and are a natural part of the economic cycle. Although they vary in severity, they all follow similar patterns and you can easily find information online about how it all works. One of the best videos I’ve seen on how the economy works– specifically what drives economic cycles– is by Ray Dalio and is free on Youtube. You can check it out here. 
• If you own a property without much equity, like if you purchased a house with an FHA loan in the past 6 months, prepare to hold it for at least 5 years. Unless you’re willing to sell at a loss or are in a market with exceptional circumstances, it’s unlikely that your property will appreciate as quickly (or at all) for a while.
• If you’re a buyer who is getting a mortgage and have been searching for more than 90 days, your buying criteria will almost certainly have to change. Since your loan amount is ever-shrinking with the increasing rates, you may have to buy a smaller property in your desired location or expand your search to different areas. There are a few ways to avoid doing this, such as buying your rate down, but they will all cost more up-front cash.
• Consider getting an adjustable rate mortgage. Adjustable loans are often fixed for 3-7 years and allow buyers to lock in at a lower rate than a standard conventional loan. You will carry the additional risk of the rate changing in the future, but it can save you quite a lot of money in interest payments with proper planning. 
• If you own several properties, right now is the time to re-evaluate your whole portfolio and be very conservative with your numbers. If you are in the middle of rehab projects that you’ll be selling to a retail buyer, they may sell for less than you think. It’s hard to bite the bullet and make the proper price adjustment the first time but it’s WAY better than chasing the market on the way down.
• Cut your business and life expenses by 10%. Everyone has extra bills, fees, and subscriptions that they don’t really need and now is the time to get ahead of them. I personally just did this for myself and used this free budget calculator to help me organize all of my expenses.

Last but not least, don’t forget that more rate hikes are scheduled for the remainder of the year. Plan as if rates are going to be higher in 6 months than they currently read. The economy is going to continue to worsen and inflation is going to continue running rampant. If you’re ready for the worst case scenario, you won’t get caught off guard.