February 03, 2023

What a Difference a Year Can Make - Issue 346

The real estate headlines are screaming about how high interest rates have spiked and how far prices have fallen. You’d think we were in the middle of a full blown depression and that if anybody was buying a home today they should have their head examined.

Yes, interest rates are up considerably compared to 2022, and if we see those rates again, that means we'll be in trouble again. The mortgage rates from 2020 through to this year were a response to a global event, the pandemic. I don’t know about you, but I sure don’t want to go through that experience again any time soon.

I’m always digging for a different angle, a different perspective on what I’m seeing.

Here’s the scenario.

Early last February, a typical detached home in Guelph of 1330 sqft had a median list price of $784,450. It sold in a week for a median sale price of $908,500 (If you were a buyer then, sorry to dredge up that nightmare). Homes were selling at 120.7% of list price. You paid a 20% premium to buy in that market.

38 homes were sold in Guelph in the week that ended February 4, 2022.

Fast forward to this week.

The typical Guelph home of 1369 sqft is listed at a median price of $739,000 (down 5.79% from Feb 2022). That home will take 14 days to sell, and will sell at a median price of $712,000 or 99.01% of list price. That median sales price represents a 21.63% decrease in sales price over 2022 (that’s the big headline today).

There were 25 homes sold in Guelph this past week, down 34.21% from the same period last year (second big headline).

You would think buyers would be flocking back into the marketplace.

In my opinion, FEAR is still a significant driver in this market place. Interest rates are up significantly from a year ago. A variable 3 year rate in February of 2022 was 3.14% and today, that same mortgage will cost 6.15%.

That’s one of the big headlines, the other two being sales numbers are down 34% and sales prices are down 21%. Big scary numbers that if you follow just the headlines and the lead stories, nobody in their right mind would be buying or selling in this market.

There is a percentage of people that are doing just that - sitting frozen in fear.

Below are some illustrations using the median prices and sales data from above and using the interest rates from 2022 and today.

The first chart shows the purchase of a home in 2022 with 20% down payment.

This next chart shows that same house selling this week in Guelph with 20% down payment, 3 year term, 25 year amortization. This year will cost you an extra $101.43 per month for the mortgage payment.

The increased monthly payment is not that significant. Have you noticed what is significant about these two illustrations?

Look at what the balance outstanding will be at the end of 3 years. More importantly, that home today will take $39,300 less down payment to purchase (20% is $142,400) compared to the $181,700 down payment required in 2022.

I’d much rather pay a slightly higher interest rate, save a ton on the down payment, and have less of a mortgage balance to deal with in 3 years.

Of course, that’s not a headline that is being written because it doesn’t create drama and anxiety the way the other headlines do.

There is a window of opportunity, in my opinion, for sellers to take advantage of these current conditions because as inventory levels start to build, there will be less pressure on buyers.

We’ll start seeing the sales to listing ratio grow from 99% to lower numbers.

This market really is what we would have considered a strong normal market only a few years ago. The challenge we have in seeing these conditions as a positive is that we are still fixated on the extremes the market has just gone through. Incredibly high prices, incredibly low interest rates, inventory rates and FOMO driven demand.

Smart buyers and sellers will be having some in depth conversations with their real estate and mortgage professionals as they get their deals in place before the market wakes up to what’s available today.

It’s all about perspective - what lens are you viewing the world through?

Want to carry on the conversation? Reach out anytime by emailing paul@homegrouprealty.ca.

Enjoy the weekend.

Paul

CHECK IT OUT! WE’VE JUST RELEASED OUR