Connect The ICSF Speakers: Matthew Gardner on explaining the housing market to clients

Why 'interest rates define what we can buy'

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“Are we in a real estate bubble?” That’s a question that Windermere chief economist Matthew Gardner has to answer for agents almost every day — because both buyers and sellers want to know if they’re doing the right thing (or not).

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Not every brokerage is fortunate enough to employ a full-time chief economist, but you can get Gardner’s answer to that question — plus the four things that he thinks are good leading indications that the housing market is healthy or hurting — at a special session at Inman Connect San Francisco, taking place July 17 through 20 at the Hilton San Francisco Union Square.

One of those four factors that indicate the health of the housing market is mortgage interest rates. As the Federal Reserve responds to the robust economy by continuing to increase its key interest rate (the rate at which banks can exchange funds), everything from credit interest rates to mortgage interest rates is affected by that change.

The Fed increases — and decreases — rates depending on how fast inflation is increasing and how well the economy is doing. It usually raises rates in response to a growing economy and increased inflation, which is what we’re experiencing right now, and we can expect to continue to see Fed rate increases throughout the remainder of 2018.

What’s that mean for housing? Gardner has an explanation.

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“Interest rates define what we can buy,” he said. “I have a rule that I call the ‘1 in 10’ rule: for every 1-percentage-point increase in mortgage rates, people can buy 10 percent less house.”

So if your buyer clients feel financially comfortable purchasing a $300,000 home today, and if mortgage rates jump by 1 percentage point tomorrow, those buyers will have a new realistic budget of $270,000.

Mortgage interest rates were 3.95 percent on January 4, and they’ve gotten as high as 4.47 percent as of late April (that’s 5-percent less money that buyers can spend on a home, if you’re keeping track!); the Fed has indicated that it plans to hike rates either three or four times total this year. Each rate hike is typically a quarter of a percentage point.

With that understanding in your pocket, you can encourage your buyer clients to make a move before the Fed hikes rates again — and your seller clients to hurry up and list before there will be fewer buyers who can afford to buy their house.

What other indications help forecast the health of the housing market — including local metrics that can help you explain what’s going on to your clients? Find out when Gardner lays them out at Inman Connect San Francisco in July.

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