So you’ve tuned in to our latest blog and I’m certainly glad you did but let’s just address the elephant in the room right now. You’re assuming I’m going to tell you to buy in 2023 since I’m a Realtor and I want to get paid. Well you’re wrong. Okay well now that we’ve gotten that out in the open and hopefully I’ve restored my credibility let’s talk about whether you should buy in 2023 or 2024.
Whether you buy in 2023 or 2024 depends on two things: what is your goal for home ownership and when will the market get you there.
Now that is probably not at all what you expected so let’s talk about what those goals might be:
Is your goal to buy when homes are more affordable. Is this strictly about your monthly budget?
Or, is your goal to buy at the best possible price. You want rock bottom and you certainly don’t want to catch a falling knife where you end up upside down. I have people commenting on my videos all the time saying they want to see prices drop by 30%, 40%, 50%. That’ll certainly make you wait, won’t it?
I want you to think hard about this because these are two very different things and you cannot have both in Dallas. Let me explain.
Here’s the thing, interest rates drive affordability in an exponential way. If you want things to become more affordable overall you’re going to see that happen much more effectively through interest rates going down. In fact, let me show you that.
In Denton County in January of 2022 the median sales price was $420,000. Your mortgage payment would be $1,771 per month at 3% interest rate. Now if you wanted to have that same monthly payment at today's six and a half percent interest rate you would need the median sales price to be $280,000. So how close are we to getting that price in the market? Well in February of 2023 the median sales price was $425,000 with a mortgage payment of $2,686.
Now taking a look at Collin County you can see the median sales price in January 2022 was $465,000. The mortgage payment was $1,960 at 3% interest. So how much would we need prices to drop to get that same monthly mortgage payment at today's rate of 6.5% interest? Well, we would need the median sales price to be $310,000. As of February of 2023 how close are we to seeing prices drop that much? Well, the median sales price in February of 2023 is $485,000. That makes for a mortgage payment of $3,066 per month.
Okay well let's take a look at Dallas County. in January of 2022, the median sales price was $315,000. The mortgage payment was $1,328 a month at a 3% interest rate. Now, what would we need the price to be to have that same mortgage payment at six and a half percent interest? Well, we would need to see a median sales price of $210,000. So, are we getting close to that? Are we seeing prices drop? Well, let's take a look. In February of 2023 the median sales price was $345,000 making for a monthly mortgage payment of $2,181.
Moving on to Tarrant County we see the median sales price in January of 2022 is $327,000. At a 3% interest rate that would make a mortgage payment of $1,379. Now what would we need the price to be to get that same mortgage payment at six and a half percent interest? Well we would need to see a median sales price of $218,000. So again, let's take a look and see where we're at. Are we getting anywhere near that? Well in February of 2023, the monthly mortgage payment was $2,149 based on a median sales price of $339,945.
In Rockwall County the median sales price in January of 2022 was $390,000. At a 3% interest rate the mortgage payment would be $1,644 a month. Now to get that same mortgage payment in today's rate of six and a half percent interest what would you need the median sales price to be? Well, it would need to be $260,000. So are we getting close to that? How are we seeing prices do? Well in February of 2023 the median sales price in Rockwall County was $415,000. That is a mortgage payment of $2,623 per month.
And finally taking a look at Ellis County. In January of 2022 the median sales price was $377,923. At 3% interest that equaled up to a mortgage payment of $1,593. Now what would the price need to be to have that same monthly payment at today's interest rate of six and a half percent? Well, we would need to see it be $252,000. So are we getting anywhere near that? Well let's look at February of 2023. The median sales price is $374,900 and that makes a mortgage payment of $2,370.
So do you see that interest rates have that huge of an impact on affordability? How drastic the price reduction would need to be in order to match the difference between 3 and 6-½ percent?
So, interest rates drive affordability. Now, secondly, in Dallas, interest rates drive demand in an exponential way. Now, tell me the truth, as we were looking at those sales prices, you probably expected to see sales prices down, right because affordability has been so compromised. Instead we saw them increasing in every county except Ellis County.
Okay so why is that?
Well, the issue is a constantly reinforced and growing demand. 300 people a day are relocating to Dallas and they all need a place to live.
Secondly, Millennials and Gen X’ers are all wanting to enter the housing market
So we have a state of consistently high demand here in Dallas
Now right now, we saw that prices have gone up, in spite of a 6.5% interest rate. Probably not what you expected, but it goes back to demand.
Because of that same high demand, when interest rates drop even slightly we see a huge change in market activity
And of course as buyers enter the market we see demand driving prices up
In Dallas pretty much the ONLY thing that is effective in stopping demand is affordability. When the interest rates went up last fall, demand and prices dropped off the edge of a cliff
Now we’re in the spring and even 6.5% interest rates aren’t enough to cause prices to drop. It’s demand vs. affordability and right now, in the spring, demand is marginally coming ahead
Now I want you to think about this if you’re counting on affordability coming through price drops. If the 420k home we saw in Denton County dropped to 280k, right, in order to match that same monthly payment, what would happen? It’s easy to picture it very personally, as the only person waiting. But in that event, there would be a relative stampede of buyers just like yourself who would drive those prices back up. Realistically they would never be able to get that low.
Waiting for affordability to happen as a result of prices dropping - that will not occur in a vacuum. You are not the only one waiting. All the other Dallas homebuyers are waiting too and that demand will drive prices back up
So if affordability is the most important thing to you, that’s your goal, this is all about your wallet, it’s more likely you’re going to find it through rates going down, rather than prices going down. Interest rates are just more effective and more realistic.
Here are a few things to think about:
When interest rates go up = Your affordability factor is going to get worse, demand goes down and prices go down
When interest rates go down = Affordability increases and it doesn’t take much interest rate movement to increase it by a lot. Buyers will enter the market and that demand will drives the prices up
So are you starting to see how affordability and rock bottom home prices are two different things? Realistically, you have to choose between the two goals. But okay, I see your doubt, it’s palpable, so let’s play devil’s advocate for a minute.
What would need to happen for you to be able to have both?
You want affordable and you want it at rock bottom prices. All those people who are predicting a 50% drop in values, right? This is the platform they’re counting on.
First of all, to really get that affordability you have to have interest rates go down. Interest rates affect affordability so much more than home prices
Secondly, you’d have to see buyer demand evaporate in the midst of interest rates going down and as homes are becoming more affordable. Otherwise we’re back to bidding wars, right?
If buyer demand won’t evaporate - and in Dallas it definitely won’t - the market will need to be flooded with an over saturation of affordable homes
Essentially to have your cake and eat it too, what you’re watching for in the market is for rates to drop, for prices to drop right along with those rates and there to be a sudden massive, influx of affordable homes so buyer demand doesn’t drive prices back up. I do not see this scenario playing out but I would love to hear your opinion so definitely comment below
To recap:
If affordable is your goal
Remember, to get the same affordability you would get from interest rates going down, prices would need to drop in the hundreds of thousands of dollars AND you would need no one else competing with you. If you have other buyers competing with you that will drive prices back up.
Most likely place that affordability is going to come from is lower interest rates OR from the equity in selling your own home
With affordability as your goal - interest rates coming down will bring you there. You just need to mentally prepare yourself for what a market with high demand looks like - bidding wars, paying over the list price, shortened inspection periods. That is the likely road to maximum affordability
Ideally you’re very aware of the market and you’re the first buyer out the gate when rates come down to a level that works for you
If Rock bottom prices are your goal
They’re going to come from very low demand
If that is your goal you’re going to have to swallow the idea of a higher interest rate
Massive over supply of affordable homes could lower demand but you’ve got to ask the question, where are those homes going to come from
Rock bottom prices from high interest rates: possible
Rock bottom prices accompanied by low interest rates: I do not see that happening but again, if you disagree, I’d love to hear your comments!
So, now that you understand each side, what is your goal? Is an affordable, low monthly payment the most important thing to you? Or, are rock bottom prices your goal even if it means your monthly payment is higher and it will. In Dallas, you’re not going to get both. There’s too much demand for that, too many other people waiting for the same thing. Now the market is very volatile right now. We see low inflation measurements, then we see them a bit higher than the Fed wants to see. Then we see mounting bank failures. Here’s something I want you to think about. In the past, each time the Fed aggressively raised rates they would trigger a cascade of events - kind of like a dam breaking - that caused them to lower rates quickly. After aggressive moves upward you don’t see rates gradually lowering. You typically see fast movement. My recommendation is to be ready. Be preapproved by a lender. Have your buying plan in place. Know where you want to buy and what type of home you want to buy. If you’re wanting rock bottom prices, that’s going to happen when interest rates are at their highest, when demand is most inhibited. If you’re wanting affordability, you’re going to want to see those rates go down. Just be aware that when they do, all the bidding wars are going to come back. You want to be the first one out the gate before demand spirals. So are you buying now? Are you waiting until 2024. Know your goal and be ready to act quickly when the market brings it to you.
Now one thing we really didn’t get into today is the predictive side. Big picture wise we know we’re looking for interest rate movement right? How can we know when the big changes are here? Well to get that information you’re definitely going to want to check out our next blog (Dallas Housing Market: Have prices bottomed out in Dallas?) where we check in with the experts on when exactly that dam is going to break.