The Unintended Consequence Of Low Interest Rates

The interest rates of the last decade have been the greatest incentive ever offered to homeowners. The stimulus of low interest rates worked effectively to make affordability of homes an incentive to homebuyers. Sales of homes in Anne Arundel County soared for four years in a row with more than 10,000 homes sold per year.

To put that into perspective, there has never been a year in recorded history where that has occurred, and the 25-year average in Anne Arundel County for homes sold is 7,500. We have seen record-breaking sales, high demand from buyers, and the average sales price rising by 20% per year.

Most homebuyers in the greater Severna Park area are move-up buyers, which means they live locally and are purchasing a home that is more expensive than the one they currently reside in. The lower interest rates afforded them the ability to trade up in house for a similar payment. This mathematical reality, combined with increased work-from-home scenarios, has pushed more buyers into a price range they had never dreamed of. Affordability created movement, and movement created record-breaking sales. There is no magic marketing formula or new employer in town to explain the explosion of values. This is easily explained by the payment-driven society we live in.

But there was an unintended consequence to these incredible rates. Once you get a 3% mortgage rate, you never want to give it up. It is common to think interest rates are all about homebuyers, but what about all the homeowners who refinanced and now have a spectacular rate and payment? Those are the sellers who are saying they would love to list their home because of its worth, but they don’t want to buy a house with a 7% interest rate.

The rates have caused a stagnation in sellers willing to list and make their move. To quantify this phenomenon of sellers clutching onto their interest rate, new listings are down 44% in Severna Park in 2023 versus 2022. Without listings, we are seeing sales dip in direct correlation to the anemic listing stats.

The low interest rates were an incentive-based marketplace. An incentive-based market is when there is an increased amount of buying and selling because of a stimulating factor like a liquidation event. We have fully transitioned into a need-based marketplace where only the sellers who need to sell will list their home and only buyers who need to buy will do it. The backdrop for residential real estate has always been driven by the need for state change such as job relocation, marital changes, families growing, downsizing and other factors that we call life.

Life happens and normal buying and selling will occur, but in my opinion, the days of incentive-based movement are over. The fundamentals of a normal market are to rely simply on the simplest economic factor: supply and demand.