Dear Sellers,

As your neighborhood Real Estate expert, I think it’s essential to be honest about what is happening in the market. Last month we talked about how the market is shifting and what that meant to the psyche of the seller and buyer. In this newsletter, I want to elaborate and show you the reality of how affordability is changing in the new market. Firstly, the market is changing even quicker than we had anticipated. With inflation continuing to rise, The Feds are getting more aggressive with the interest rate hikes. Last week they raised the rates again by 3/4%. As a result, we have seen some interest rates jump to between 6.5-7%. To better understand how drastic this is, in December 2021, interest rates were under 3%; less than a year ago. We all knew interest rates would go up, but we were thinking more in the 4-5% range. We never thought they would go up this high, this quickly. Making matters worse, the stock market has dropped significantly since last week. When will all this stop? Nobody knows! But until then, let’s understand the effects increased interest rates cause on affordability and how this affects a buyer’s monthly payment. 

Let’s take a home that’s valued at $1,000,000. The buyer puts down 20% and obtains a 30-year fixed rate loan for $800,000: In January, interest rates were 3.5%, making the monthly payments $3,592.36. At the beginning of September (before the last 3/4% increase), the interest rate was 5.75%, making the monthly payments $4,668.58. With the most recent increase, the same loan has an interest rate of 7%, making the monthly payments $5,322.42! That is a $653.84 difference just in one week and a $1,730.06 difference since January, FOR THE SAME HOUSE!

We have now seen prices drop between 12-15% from the crazy highs we saw at the end of 2021 and in the first five months of 2022. We started 2022 with about a two-week supply of inventory, the lowest levels we have ever seen. Due to the inventory shortage, buyers were willing to pay $25,000, $50,000, and even $100,0000+ over asking to get into the market. We even saw some crazy overbidding through May. With the first 3/4% rise in June, we saw a complete shift in the market and the buyers’ psyche. Over the past four months, interest rates have gone up enough to cause buyers to halt. Buyers realize they cannot afford these crazy prices with the higher interest rates. (See example above). Each time The Feds increased, buyers would need to get requalified and quickly find out they were losing buying power. That was also the end of the good times for the sellers. We no longer saw floods of showing requests, packed open houses, and offers streaming in. We started to see fewer showings and homes sitting on the market for over 30 days without a single offer. We saw price reductions for the first time in a couple of years, and in some cases, the same house needed 2 or 3 price reductions, which may not be enough to sell the home.

Now, before you get discouraged, I do have good news. Despite everything I have just shared, prices are still up 3-5% over prices from one year ago. You may be asking yourself, how can this be? We must remember that last year’s prices were the highest we had ever seen. Due to that, we are still at unbelieve prices, prices that would have shocked any seller last year. We may be done with the crazy markups we saw in the first five months of 2022, but we are still higher than previous years’ prices, making it the perfect time to sell. If you can still get 5% more than the prices from last year, you are doing exceptionally well. Sellers who are realistic about the market will do extremely well as they will price their home according to current trends and see plenty of buyers. Sellers who focus on what they could have gotten if they sold their house during the first week of May will only be disappointed and make poor financial decisions. We believe the market will drop an additional 15-20% before it hits its bottom over the next two years.

I want to show one more example to drive my point home further. Suppose we take an original house in Oak Park, built between 1968-1976 and about 1,700-1,800 sqft. For this example, we will say the home is in good condition. In the Summer of 2021, this house sold for between $900,000-$950,000. By the end of 2021, that house was selling for between $1,050,000-$1,100,000. In the first 5 months of 2022, it was selling between $1,100,000-$1,200,000. Today that house is selling for between $1,025,000-$1,075,000. As you can see, we are still above the heights of last year, which was $950,000. By the end of 2022, that house has a better chance of selling under $1,000,000 than selling over $1,100,000.

In a typical correction, it takes seven years for prices to drop and go back to their previous highs. In 2008, it took ten years for prices to get to those highs due to the severity of the correction. Therefore, we think it will take seven years to get back to the current prices, and it could take 10-12 years to get back to the crazy over-bidding we saw when interest rates were under 3%, and inventory was less than a month. Therefore, if you plan on staying in your home for the next seven years, you will ride the market down and back up. However, if you are considering making a move in the next three years, we would like to discuss how you can protect your investment and equity in your home.

Call, text, or email, and let’s start the conversation today. Knowledge will always be power, and we want you to have the most of it regarding your most valuable asset. Happy October, Friends!