From travel to toilet paper, the effects of the COVID-19 pandemic seem to be everywhere. If you’re a homeowner, there’s another thing you might want to keep an eye on: Falling mortgage rates.
In early March, the Federal Reserve cut rates by half a percentage point to keep up with the market, and then cut rates again by 1.5% on March 15 in response to the growing crisis.
If you’re already a homeowner, what does this mean? If you’ve been thinking about refinancing, now’s a good time to lock in a low rate. But if you’re concerned about the value of your home—particularly if you’re looking to sell in the next year—the news is a little more complicated.
We’ve talked before about how the pandemic is impacting real estate in general. So here’s how the latest low mortgage rates might impact home values.
1. Low mortgage rates (typically) means more buyers.
Low mortgage rates generally motivate many potential homebuyers to take the leap into homeownership. When there are more buyers than there are homes, it’s all about supply and demand: More buyers + fewer homes = increased property values. However, that’s the expected scenario when there are low rates without a worldwide pandemic.
In residential real estate, the measurement used to decipher the supply and demand ratio is called “monthly supply of inventory.” A normal market has 6-7 months of inventory. Anything over seven months is considered a buyer’s market (where prices go down), and anything under six is a seller’s market (where prices go up).
The latest report from the National Association of Realtors shows that nationally, we’re at a 3.4-month supply of inventory, indicating that we’re still in a strong seller’s market. If COVID-19 keeps buyers at home and properties linger on the market, price cuts may be on the horizon—though this isn’t something we’re seeing yet.
In addition, lower interest rates make home ownership more affordable because it decreases monthly payments. This generally increases the number of people who are able to afford buying a house—which raises demand (and home prices). For example, on a $300,000 mortgage, the difference between a 4.5% and 3.1% interest rate is $240 in monthly payments ($1,520 vs. $1,280). Plus, the difference in total interest you’d pay over the life of a 30-year mortgage is $86K! (Who wouldn’t want to save $86K over 30 years?)
2. Real estate isn’t the only thing with low rates right now.
Interest rate changes don’t just affect mortgages, it also affects savings accounts, CDs and other investments. Lower rates of return elsewhere mean less capital that could go into purchasing real estate, a factor that puts “supply” ahead of “demand.” Ideally, though, lackluster rates of return could motivate potential buyers to put their money into real estate instead, leading to a rise in home prices (and home values).
3. Buyers could be waiting for even more cuts.
While no one knows the long-term effect COVID-19 will have on the economy, many anticipate another rate drop to come. If too many buyers decide to take a “wait and see” approach, this could lead to homes staying on the market longer, which would lead to price cuts and possible trends in lower home values (if it’s a long-term issue).
So to summarize, low mortgage rates generally mean good news for sellers—but the COVID-19 pandemic definitely adds an element of uncertainty and exceptions to the rule. While national trends are an important factor to watch, the best indicator of your local market is, obviously, to keep an eye on the local market—and talk to people in the area (cough, cough) who know what’s happening near you.
And remember: Every seller has different timelines and priorities, and multiple factors that could impact their home’s value. If you’re concerned about how your home’s value could be affected by low mortgage rates or just want more info, let’s grab some [virtual] coffee! Drop us a line anytime.