Laurie Johnson

How Inflation is Changing Lake Tahoe's Real Estate Market

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According to the National Association of Realtors, pending home sales dropped 1.2% in March.  For the 5th consecutive month, contract signings declined. Compared to last year, pending sales are down 8.2%.

Rising interest rates and rising home prices are quickly reducing the amount of available buyers in the housing market. However, the impact is only changing a market of multiple offers to one of normalcy. This means that we won’t see home prices fall any time soon.

The housing market is still experiencing a shortage of supply. Builders have not been building for many years and have not kept up with increasing demand. The lack of supply pushed home prices up 20% just since last year.

The mortgage industry is working to strengthen affordability by introducing the return of the ARM or adjustable rate mortgage. This will help to keep buyers in the market.

Additionally, while affordability decreases, homebuyers will simply shop at a lower price point. They may not get as much house for their money, but they will still be buying. At the same time, people are getting priced out of the market. Rising interest rates means higher monthly payments and some people won’t be able to afford a home.

Are We in a Bubble?

The slowdown that is predicted is not viewed as a bubble burst. It is merely the calming of a fast paced and frenetic market of homes selling sometimes 20% over asking price. Economists and mortgage professionals do not see a crash coming. They also are not predicting any type of dip in home prices.

The crash of 2008 was driven largely by how easy it was to qualify for a loan. This has changed in today’s market. The underwriting process is far more strict. This ensures that people don’t become homebuyers if they can’t afford to do so.

In terms of foreclosures, there is a rise in the amount of foreclosures over last year. However, homeowners have much more equity in their homes in this market. If home prices were to adjust down – they’d still have room to sell and pay off their mortgage.

Inflation will slow the rise in home values as supply and demand come back to a sense of balance. There are still more buyers than available houses, so experts are not expecting values to drop.

Return of ARM (Adjustable Rate Mortgage)

According to the mortgage industry, applications that include an Adjustable Rate Mortgage have doubled in the last few weeks. As fixed rates continue to rise, introductory rates in the form of ARMs are becoming more common. The fixed rate is currently at 5.3%, up a whopping 3.1% from just last year!

The average rate on a 5-year ARM, is only 4.28%. A one percent change in the interest rate can affect monthly payments in a way that will keep more buyers in the market. For example, a $400,000 mortgage at 5.3% has a monthly payment of $2,221. When the interest rate is reduced to 4.28%, the payment drops to $1,975.

This introductory ‘teaser’ rate can give some buyers 5 years to build up their finances and re-finance. The initial introductory rate can span 5, 7 and sometimes 10 years. It is important to remember that the Fed is planning many more interest rate hikes and experts believe interest rates will rise in the future.

Should You Get an Adjustable Rate Mortgage?

For buyers who don’t plan to own the home for more than 4 years, an ARM may be worthwhile. Buyers who are forced to settle for a home they do not love, will find the ARM attractive.

However, the interest rate on a fixed-rate mortgage is locked in for the life of the loan—whether it’s 15, 20, or 30 years. Buyers who are planning to stay in their home for an extended period of time, may be better off with a fixed rate mortgage.

Sales activity in the Lake Tahoe basin has definitely slowed. However, we are not seeing many price reductions. This is the perfect time to list your home for sale, if you have been on the fence. Contact me today for a free property analysis on your home. If you are a homebuyer, I can help you find the perfect retreat at Lake Tahoe.



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