By Budge Huskey
Chief Executive Officer
Premier Sotheby’s International Realty
We’ve all read the headlines: The Federal Reserve has recently raised funds rates for the first time since 2018, indicating a shift in focus from pandemic relief efforts to inflation control. While we knew higher mortgage rates would soon follow, the impact on demand for housing is not so certain – especially in Sarasota’s red-hot housing market.
The 30-year fixed mortgage has risen dramatically in recent weeks and currently approaches 5%, a figure not seen since 2009. And with the Fed anticipated to raise fund rates up to six times this year, this escalation is far from over. Historically, there has been a highly correlated relationship between interest rates and the demand for housing, with the ability to project within a small margin of error how sales would react to a rise or fall. And while the general relationship remains true on a national level, there are many other factors which come into play at a local level.
The impact on general housing affordability with rising rates is undeniable, as even small increases will negatively affect both abilities to qualify and the amount of loan which may be obtained. As the largest impediment to homeownership is the lack of a sufficient down payment, rising rates put first-time and moderate homebuyers in an even more precarious position. Adding additional interest costs on top of escalating home prices presents an almost insurmountable hurdle. This is incredibly unfortunate for so many reasons, yet ultimately may not prove the most significant factor in sales activity in the Sarasota region.
While low mortgage rates have been a boon for the housing market, rising rates actually can make housing even more competitive in the very short run. Those who are “on the fence” about buying may take the plunge to lock in current mortgage rates or even choose to finance what would ordinarily be a cash purchase. Yet I would submit rates are not as critical as one would believe, at least here.
Over recent years, the increasing amount of wealth being drawn to the market from around the country and the world has served to shift the norms in housing finance. What would have historically been an environment in which three out of four purchasers sought a mortgage, cash purchases now represent an increasing share of sales. In the upper price categories, local lenders will tell you the percentage of cash sales is anywhere from 75% to as high as 90%, figures more in line with Palm Beach and Naples. In essence, rising mortgage rates represent merely a psychological rather than financial impression on these buyers.
Even those who would prefer to borrow when purchasing to utilize their capital in ways which provide a higher return have been finding little option. The hyper-competitive environment in which quality properties are limited in relation to willing buyers almost assures multi-offer situations in which a mortgage contingency will lead to rejection. This is even true in the more moderate price ranges in which the competition also includes the investor class.
The reality of today is that rising mortgage rates will have far less of an impact on sales in Sarasota than what would have been the case years ago. Demand, having pulled slightly back from its zenith last year, will remain incredibly strong among qualified buyers purchasing for either year-round or seasonal use.
Any sizable change in sales activity will come not from rates this year, but rather from the fact there are too few homes entering the market to allow demand to be fully realized. In essence, our real estate year won’t be determined by buyers, but rather, sellers. If you are considering listing your home, it may be the right time to take advantage of heightened values and help return more equilibrium to supply and demand in the market. The brokerage community stands ready to assist!