Minnesota Real Estate Investors Association, Inc.

Everyone knows that as interest rates rise, Real Estate prices drop.  It is only natural.  If the current interest rate is 4% on a $300,000 loan, the monthly PI (Principle & Interest) payment is $1,432.25.  If the interest rate goes up to 7% and the average buyer can only afford a monthly payment of $1,432.25, then the maximum amount they can borrow goes down to $215,277.40.

This is affectively what has happened over the past year and a half, so why have prices continued to climb?  That’s a great question and can be explained by the extremely low inventory levels.  The level of inventory has been so low for so long that the principles of supply and demand have caused prices to increase dramatically. 

In other words, if interest rates hadn’t risen so much so fast, the average loan balance may have risen to $565,000.  That is what the borrowers could afford based on the current average monthly PI payment of $2,700 and an interest rate of only 4%.

The following chart shows the affect interest rates have on a borrowers ability to pay over the past 18 months.

25% of all listing had a price reduction last month and inventory levels are rising. We are still in a sellers’ market, but we are transitioning into a buyers’ market.  When that happens, sellers buyers become picking and stubborn sellers slowly become more receptive.  The first phase of this transition is for sellers to drop their asking prices, and that is starting to happen. 

The next phase, if interest rates remain high, will shock the sellers and if they have to sell, they will drastically drop their price to get a sale and that has a snowball affect on prices.  The only thing that can help the sellers now is for inventory levels to remain low and interest rates to drop a little.

 When you first think of the consequences of rising interest rates, you could naturally conclude that would drive Real Estate prices down.  Over the long haul, you would be right.  However, when you look at what is going on now as rates are rising, you might be shocked to see that both rates and prices are rising together.

Mortgage rates have been increasing steadily since the begging of the year 2022.  At the beginning of the year, mortgage rates were right around 3.2%.  As of the end of April 2022, mortgage rates have risen to around 5.2%. Some resources are show as high as 6.1% as of this writing.

The interesting thing is that the median sales price for Real Estate is also increasing. The median home values of Minnesota, my home state is currently $326k, the twin cities metro area is a little higher at $340k. 

So why are prices still increasing at the same time interest rates are also increasing.  To explain that you need to have a little understanding of economics.  In the simplest form, when supply is high and demand is low, rates tend to drop lower to encourage borrowing. 
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During these uncertain times, many people are struggling with the question, should I request a mortgage forbearance from my lender.  That is not a simple question to answer unless you know the reasons why you need to request a forbearance and what the ramifications are.

First question is, can you continue to make your mortgage payments?  If the answer is yes I can, then the answer is obviously no you should not request a forbearance.  If the answer is not, then yes you should request a mortgage forbearance. 

If however the answer is yes, but you won’t be able to afford something else like utilities, gas for your car to get to work, food for the kids, medication or so other necessity, then you probable should request a mortgage forbearance from your lender.

What is a Mortgage Forbearance?

Forbearance is when your mortgage servicer, that’s the company that sends your mortgage statement and manages your loan, or lender allows you to pause or reduce your payments for a limited period of time.
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The simple answer is yes.  The correct answer is a little more complicated than a simple yes or no.  There are many factors to take into consideration and there are pros and cons to selling at any time.

Here are the top 3 things you need to consider before answering that question for yourself.

1. Do I/we need to sell right now?
2. Do I/we need to buy another house when I/we sell?
3. Why do I/we need to sell?

1) Do you really need to sell right now or are you just thinking about selling because of the high market prices?  There are many reasons to sell, but high market prices is probably the worst reason unless you are an investor.

2) If you need to purchase another house in order to sell, then you will have a hard time in a strong buyer’s market finding a replacement home.  In this case it would be best to find a new home first, then sell your existing home.  The problem is if you sell your current place, you will probably have to overbid on a property to get one under contract to close on your time frame.

3) Why do you need to sell right now? If you have a reason to sell then you will be able to make logical decisions because you have a clear reason.  If you just want to sell to see what the market will bring or to access cash from the property, then you might make some bad decisions because you don’t have a clear reason why.

If you have a clear reason why you have to sell, then give us a call because we have flexible options to might make the process a much more smother transition and most people tell us that it reduces their stress level knowing that they have a buyer that can work with them on their time schedule.