Inflation, Gas Prices & Interest Rates, Oh My!

Inflation, Gas Prices and Interest Rates, Oh My!

I wanted to hop on here this morning and bring some clarity to some recent news, and let’s just get it all on the table here and help you out. Here’s what we’re talking about today. Interest rates, looks like they just hiked up to 7%. And for many people that might be a scary notion, definitely different, something we’re not accustomed to because of where we’ve been in the last few years with 2% interest rates and 3% interest rates. But the purpose of this video this morning, or today, is to bring clarity to the selling and buying conversation. What does it mean to you? How to navigate through it? And to dispel many mistruths because there’s a lot of information flying around there.

If you’re watching the news, my gosh, it might just steer you in the wrong direction. The doom and gloom that you’re seeing on the TV, and the news, and perhaps on the radio and internet, watch this video all the way through. I’m going to share with you. I’m going to demonstrate because words sometimes can be misleading. So I choose to, not just use words, but show you. So stay tuned here. Let’s talk about what’s going on with the interest rates, what it means to you and not just interest rates, but the market conditions, and what it means as a seller and a buyer.

So first and foremost, I’d like to share with you a snapshot. Let’s go back in time for a minute. So we have a mortgage calculator here, and you can use it too if you want to do your own research, mortgagecalculator.org. It’s free. Let’s just take a home. Now, you notice the home value here is $420,000. Now, the reason why I plug that in here, because the baseline of this list price back three or four months ago. Let’s just take this thing back to February and March.

The experiment we’re doing here would be on a $350,000 home. Doesn’t matter where you are. There’s numbers across the country. Everyone was in multiple offer situations, so let’s assume that the price was 350,000. Now, what we all know is that home would’ve ended up at 420,000 through multiple offers. It probably would’ve received anywhere from 10 to 30 to 50 offers. And in some parts of the country, the price would’ve been even higher. But we went through and looked at the data and we looked at the percentage of the sales price, list price ratio for that type of a property, and we landed on an average. It would’ve gone up to about 420,000. So keeping things simple here, I think it’s a pretty conservative number, but let’s just use it today.

Down payment of 5%, assuming someone’s putting a 5% down, I get that could vary On the second tab here, I’m going to share with you the same down payment scenario. Actually, we could probably increase that, but let’s just do this. So 420,000. In fact, I’m going to adjust it, and I’m going to tell you why, which would leave you with a loan amount of 399,000. 3.75% interest rates. Now, there was just a hike yesterday. We’re pushing up against 7% right now. So that one fact is scaring a lot of people. And they’re actually using words such as not affordable and pushed out of the realm of possibility. I’m going to share with you why that’s actually not true. So in other words, if you’re not doing this analysis, this might be extremely helpful for you. 30-year mortgage. Property tax, I threw in $3,000. PMI, private mortgage insurance, will be applied to this scenario because you’re not putting down 20%. And then, I calculated that, and that produced the results on the right side here, which is a mortgage payment of 2,264.

Okay. So I’m going to keep some tallies here. So let’s look at what that would be in scenario one. We have 2,264 as a monthly payment. By the way, unless you’re paying cash, this is all about one thing. It’s, what’s my payment? How much is my monthly payment? That’s what everyone’s concerned about. Okay. Let’s look at the scenario now, today, as if the same home was listed on the market. Well, folks, $350,000 listing, what we’re experiencing now is we’re not getting as many multiple offers. In fact, the $350,000 home is likely going to sell for 335. There’s not a huge concentration of buyers. This whole run up of pricing because of the lack of inventory is going away. And now we’re settling into something that’s more of a natural market.

But before I move on and give you the rest of the story here, as Paul Harvey would say, understand that there is complete misleading information out there. You have to understand this. What we had experienced for the last two years was an extreme seller’s market. Sellers would say, “I don’t want to sell. I would because interest rates are super sweet and I could buy my next place. I really do want to get out of home A to get to home B, but I can’t. Why? Because I can’t find anything to buy. Why would I move?” So they stay where they are, wishing and hoping and praying for the utopia of a market condition, which would be more homes to buy so I could sell my home and move into the condo, or move into a bigger home, or a smaller home, or whatever that next move would mean for them. Got it? Okay.

What’s going to change the market conditions? What’s going to be the cause to the effect of more inventory? Interest rates. Insert the white Knight riding on the horse and giving the marketplace what it needs, which is more inventory, less run up of pricing, just chilling things out a little bit. So now we have interest rates that have gone up. Now we’re going to have more homes on the market. So more inventory allows for those sellers that were stuck in home A. Let’s say this is home A. I’m stuck here. I can’t sell because I can’t find my next place. I want to buy home B, the sticky note home B. Now you have what you want.

You see, here’s the thing, though, is that many people think that they can pick and choose the causation. In other words… I’m sorry, the effect. In other words, actually the causation, because I want this new type of market, in other words, I want more inventory to be there, but I don’t want the interest rates to also be higher. You see, one thing leads to the next. You can’t have your proverbial cake and eat it too. This is what you’ve been asking for. This is what you’ve been looking for. This is what the market needs is, is an adjustment and a shift. So we’re experiencing that the pendulum swung way far to the left, extreme sellers market, and now it’s moving its way back. This is what markets do.

If we look back to 2006, when we peaked out and then the roller coaster hovered at the top of that hill, and then it started to drop, and it dropped quickly, and it dropped for six years, at least where I’m at, where we’re at in west Michigan. So this is what it is. It’s actually a good thing, believe it or not.

So what does it look like from a numbers standpoint? Now we have more homes that are going to be coming on the market here in the summer months, more inventory, more flexibility. Because if homes are taking a little bit longer to sell, that means that when you’re going to buy after you’ve sold your home, you’re going to be able to move around and navigate and look at more properties, knowing that they’re not going to sell them 24 hours or less like they did before. This is exactly what you have been asking for.

But Kevin, the interest rates have gone up so much and we just can’t afford that next home. Hold on a second. Do you remember what happened when homes were put under multiple offers? Buyers were paying over list price. And I showed you that example, 350 went to 420. So now we’re talking about a $70,000 Delta. In other words, buyers are paying $70,000 over the list price, list price based upon, mostly, recent sales comparables. So now we’re seeing that buyers from day one we’re in a negative equity position. If the market were to drop like it did in 2007 and ’08, after they did that, they would be in a negative equity position immediately.

So now what? Now we’re actually in a better situation because buyers aren’t in a negative equity situation. They’re in a positive equity position from day one because down payment, and if the market continues to go down, or even if it’s going up steadily, that down payment’s going to offset that and they’re going to be in a positive place. If they get it for less than list price or less than market value, they’ll be in a positive equity position from day one. So that’s a big difference.

Let’s look at something else here. So let’s look at scenario number two. That same home, 335,000 rather than 420. That is a big difference. Massive difference in price point. 5% down, assuming that… Now, here’s the thing, though, this is what was happening. I have to adjust this, and here’s why, because what buyers were doing before the market shifted is they were taking their down payment money. The reason why I put 5% in that first scenario is because they wanted to put down more, but they couldn’t because they were using that for a appraisal gap. They’re using that to show up an appraisal guarantee, to guarantee the difference between a purchase price and appraisal. They’re coming out-of-pocket for that. So they couldn’t apply it to the down payment. They just shifted their money around and used it in a way that would allow them to get into the home.

Now before you sell your home, it is advisable to focus on those low cost, high return items

Let’s look at something else here. So let’s look at scenario number two. That same home, 335,000 rather than 420. That is a big difference. Massive difference in price point. 5% down, assuming that… Now, here’s the thing, though, this is what was happening. I have to adjust this, and here’s why, because what buyers were doing before the market shifted is they were taking their down payment money. The reason why I put 5% in that first scenario is because they wanted to put down more, but they couldn’t because they were using that for a appraisal gap. They’re using that to show up an appraisal guarantee, to guarantee the difference between a purchase price and appraisal. They’re coming out-of-pocket for that. So they couldn’t apply it to the down payment. They just shifted their money around and used it in a way that would allow them to get into the home.

But now in this new situation, buyers are able to this new condition, this new place we’re now are able to use that same money and apply it to down payment, thereby, driving by building more positive equity on the front end, which is going to lower that payment. So let’s just take that and move this to a 10% down payment instead of 5%. This probably could be even 15 or 20 if you look at how that money moves. And now interest rates, I plugged in 7% just to give you that worst case, what it’s moved to. Interest rates just went up. And we did property tax the same. I’m going to calculate for a minute here.

We’re going to go back to the first scenario. Remember? Three months ago, we’re February, March 2022. We have a payment of 2,264. Now, same house, new situation. Interest rate, 7%. You’re able to put down more down payment, and you’re in a positive equity position now. The game before was, I just want a house. I need to get into a house no matter what. Now the game has changed. Now the game is I want to be at a home because I find that it’s a better place for me to be than renting. I want my own castle. I want my own place, my own backyard to raise a family. See all these benefits popping up for being a homeowner? What’s the payment now? 2,255.

So now 2,255. I’m not the smartest man in the world, sharpest knife in the drawer, brightest bulb, you name it, but what does that mean? We are saving $9. Savings, $9 savings. Stop watching the news. You’re not getting all the information. Do your own analysis. Go to mortgagecalculator.org, sit down and do this stuff. I don’t think you need to now. I just gave it to you. The reason why it’s confusing is because there’s too many moving parts and too many variables, and you’re going to get one side of this equation. The news is there to scare you and to drive attention because there’s revenue in that. If you’re not doing your own analysis, you’re going to make decisions based on faulty day data. Bad data in, bad information out. Bad decision making, poor decision making. Many people sit on the sidelines waiting for, what? The inventory is not going to change without that interest rate going up mostly. So these things are always going to be tied together. It’s exactly the right time to buy and sell when it’s the right time for you.

I was just sharing with my team this morning, should everybody be a homeowner? No. If you have a down payment and you know that you have funds in the bank so that you can pay for things that are going to possibly go wrong, like a furniture, an air conditioning, or a water heater, you need a roof repair, and you’re tired of renting, and, and, it’s the right time for you. Because if you wait until later, you’re just putting off the thing that you really truly want.

I hope this has helped you today understanding that it’s not all what it seems to be. You’re going to save nine bucks a month if you decide to make a move today versus before. Start building your equity now, getting into a situation of home ownership. This also touches on, I already brought that up, but sellers who want to buy. Think about what this presents to you today. Even though interest rates are higher, everything’s relative, and there’s other factors over here that are offsetting that clearly. So hopefully, this has helped you today.

If you want to know more about this, just reach out to us. If you’d like to have some guidance, professional guidance on how to navigate from, from home A, the mouse to home B, the cap to the water bottle, we’re here to help you. Hopefully, this has helped. Have an amazing day, my friends. Yoder Real Estate, yoderrealestate.com, guiding buyers and sellers for 20 years in west Michigan navigating through four different market conditions. And here we are again in a market shift, and guess what? It’s a wonderful thing. 

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