What is a mortgage rate lock down?
If you haven't heard the term mortgage rate lockdown yet, get ready to start hearing about it soon. Conditions are unfortunately perfect for this to happen in today's housing market. When we come from a period of extremely low interest rates and it's followed by a rapid increase in rates, it makes it extremely difficult for a lot of homeowner to move because mortgage payments, even for the same priced home, can be ridiculously higher if they locked in a low rate during the last two years. What will this do to the housing market? In the short term, it actually helps stabilize the market because as demand drops to historic lows, inventory will dry up as well. So when a decrease in demand is met with a decrease in supply, you're not going to see any major shifts in home prices. So don't expect any major shifts this Fall in the Orange County housing market. Yes, there are some areas of Orange County where home prices have stabilized and even come down a few percent but we are still in a market that slightly favors the seller right now which means if you have a home that is fully upgraded, shows well, and is marketed properly you can still get above market value for it.
If supply and demand won't be causing any major changes in the Orange County housing market anytime soon then what will? Interest rates. Right now interest rates are at the highest level they have been since 2008 thanks in part to the worse than expected CPI data that was just released. As of today we are hovering above 6.3%. So until rates start to drop again there likely won't be any large shifts in the housing market at least here in Orange County. Once we get finally get a few months of positive news on inflation, at that point I am expecting to see interest rates start heading back down. So in my opinion it's not IF rates will go back down but WHEN over the next 12-18 months we will see that happen.
Why am I so confident this will happen within the next 12-18 months? Well when you look at the history of every recession we have had in the US since 1980 we have always seen rates jump up at the beginning however at the end of the recession rates have ALWAYS dropped, on average by 1.1% from the highs. So although we most likely won't see rates again in the 2s and 3s, there is a a good chance that sometime in the next 18 months we will see rates stabilize in the low 5s or high 4's which will start to make it more affordable all buyers to start getting back into the market again and homeowner to sell and move up to that bigger home.
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Josh Alexander 0:00
Are we in the midst of a mortgage rate locked down in the housing market? And what exactly is a mortgage rate locked down? That's exactly what we're gonna be talking about on today's episode. Hi, I'm Josh Alexander from the brokerage and your host of Orange County Housing market news, your one stop shop for all things Orange County real estate. So on today's episode, we're gonna be going over what a mortgage rate lockdown is. And it's a threat to the housing market. So let's go ahead and get into it.
So mortgage rate lock down, if you haven't heard about it in the news yet, you probably will over the next couple of months, especially if rates remain as high as they are or go even higher by the end of the year. So the easiest way for me to explain this phenomenon is basically when we have a period of time when interest rates are historically low. And then within a very short period of time, we have those rates skyrocket to a much higher rate. And what this effectively does is that anybody that purchased a house or refinanced when rates were extremely low, are really going to have a hard time moving to a new home because the difference in mortgage payments, even if they're buying the same price property is going to be significantly higher, which means they're stuck in that house until interest rates start to come back down. So can you think of anything that's happened in the last couple of months or years that might produce this type of environment?
Yes, we've had interest rates historically low, the lowest we have ever seen over the last two years. And then since the beginning of this year, rates have shot up by over 3%. Right now they're hovering at six and a quarter percent. And this is causing problems for current homeowners who want to move up. So let's go ahead and go over a quick example of how bad this could be for current homeowners, and how this impacts their monthly payments if they want to move into a new property. So let's say you're a homeowner, you purchased your house five or six years ago, it's been appreciating every single year, especially over the last two years. And right now it's worth about $1.2 million. Last year, you decided to refinance when the rates were low, and you got a great rate at 3%. And you have about $350,000 of equity built up on your house. And that's going to put your monthly mortgage payments right around the $3,600 when you're just looking at principal and interest, but then you find out that your wife is pregnant, and you need to be able to purchase a new home that has one extra bedroom, so everybody has their own room.
So you go check out properties, you see that homes with that extra bedroom are probably going to be around $1.5 million. So then you go back to start to do some math. So you have about $300,000 of equity that you can take from the sale of your current property and apply it to the downpayment of that $1.5 million home. However, when you look at current interest rates right now hovering around 6.3%, and you start to do the calculations, you realize that if just looking at principal and interest alone, if you're trying to buy that $1.5 million home, even with $300,000, down, your principal and interest payments would be around $7,400. Now remember, you were paying $3,600 for your current $1.2 million home and your mortgage. So that's more than double just to get an extra $300,000 of value. So you can see that this is a significant difference when people are trying to move up just a little bit compared to what they were before. And this is the reason that you're going to see a lot of homeowners having to stay put because the payments just do not make sense anymore. Now just how many homeowners can be impacted by this?
Well, the latest data shows that 72% of all homeowners have an interest rate of 4% or lower right now. So a large chunk of homeowners currently have a great interest rate. So getting them to have to move to a property and having to deal with the higher interest rate is going to be a problem for a significant chunk of homeowners right now. So even though this is definitely not great news for any homeowners that want to be able to move up into a new property anytime soon, this might be something that helps at least temporarily stabilize the market over the next couple of months. So what do I mean by this? Well,
the biggest problem that we've had over the last two and a half years that has driven this housing market to insane numbers, is inventory inventory has been so extremely low, that there's just not enough houses to go around. So anything that reduces the amount of inventory on the market right now is actually going to keep the housing market more stable. So even though demand is at the lowest numbers that we've seen since the last housing crash, inventory is still historically very low. Right now it's the second lowest reading we've had for this time of year ever in Orange County. And this problem with mortgage rate lock downs is not helping those inventory numbers.
It's just making it worse. In fact, inventory has been dropping over the last couple of months. And it's predicted to do so until the end of the year. Now, we might not get to the lowest inventory point ever, which we reached the end of last year, but there's a very good chance that we're going to be starting 2023 With the second lowest inventory ever on the market. And that's not just because of this mortgage rate. knocked down, it has a lot to do with a bunch of other factors. So number one, people are moving a lot less than they used to. So every year, it seems like we're getting new numbers showing people are staying in their homes longer and longer. In fact, the National Association of REALTORS just came out and surveyed people that purchased homes last year. And 73% of those people said they're going to be staying in that property for at least eight years. And out of that 73% 41% said over 16 years, so this problem is not going to get better anytime soon.
On top of that, home builders have stopped building homes or significantly reduced the amount of homes they're building. So as their inventory starts to be depleted over the next six months, you're not going to see that inventory replenished on the new home site as quickly, which again, is going to keep inventory lower. So there are a lot of factors in the market that are keeping inventory extremely low right now. And those don't seem to be changing anytime soon. As interest rates continue to climb, less and less people want to sell their home, and inventory continues to go down. As well as seasonally inventory is already normally dropping at this time too. So inventory is just not going to be going up significantly enough to be able to see any type of large price corrections anytime soon in the housing market.
Yes, there are areas in Orange County, as well as California, where you are starting to see home sell under market value. But you're also still seeing homes that are in great condition upgraded, so above market value as well. So overall, we might start seeing prices stabilize and flatline. And even in some places come down a percent or two. But we're not going to get this 2030 40% decrease, like some people are predicting right now the inventory numbers are just too low for that to happen anytime soon. If interest rates continue to climb, we will see demand continued to fall. However, as interest rates climb, less people want to sell their home as well. So this supply and demand is going to be continuing to go down until we see a reversal of interest rates. So until we start seeing inflation go down and interest rates drop to get more buyers back in the market, you can expect sellers to also be staying out of the market, because it's too expensive for them to upgrade to the next home.
So when interest rates come down, there's a very good chance that you're going to see demand and supply both start going up again, at probably very similar rates depending on how fast interest rates fall. So when will interest rates start heading back down to help alleviate some of this mortgage rate lock down that we're seeing, it's pretty much impossible to predict at this point. So right now the best indicator for you to watch out for is what inflation is doing. So the last reading we got this week from the CPI data showed that inflation was continuing to be an issue, which is why we saw rates increase as well this last week. So until we start seeing inflation come down month after month after month, you can expect rates to remain relatively high. Now the good news is the chances of rates coming down over the next year or two are pretty high.
So yes, most likely there is going to be light at the end of the tunnel at some point in the next year or two, however, when that's going to happen is extremely hard to predict. And not even the experts really know at this point. So if you're trying to time the market, that's really the wrong way to purchase a house unless you're trying to flip if you're trying to buy a house, it's for you and your family. The two things you want to focus on, is that monthly payment does it make sense for you? Can you afford to live in the neighborhood with the type of home that you want to be able to buy, and it's not going to stress you financially. And number two, are you going to live there long term because
even if the market does fluctuate and go down a few percent over the next 12 months, if you're going to be in that property for 510 15 years, over the long term, your investment in your house will end up paying off, you'll have equity in your property. So you need to take those two factors into account when determining when you want to buy a home and not rely on what interest rates are doing from day to day, and what might happen in the market three months or six months a year from now you want to concentrate on your financial situation right now. And how confident you are that you're going to be living in your next home for five plus years. If both of those things work out, then yes, looking for a home right now is still going to be in the best interest for you and your family. And if rates end up going down in the long term, then you can always refinance and get a better rate. However, you don't want to depend on that happening.
You want to make sure that you can afford the rates that they're currently at. And understand that rates may go up, they may go down, but you need to be able to afford the current mortgage that you're applying for and not hope that rates go down because that type of strategy can get you in trouble down the road. So I hope you found this information useful today. If you have any comments or your own opinion on where the housing market is going. I'd love to hear it please leave it in the comments below. And until next time, stay healthy, stay happy and I'll see you on the next show.
