The sudden surge in mortgage interest rates has all but scuttled the once-trendy mortgage refinance business at some regional banks, and it’s also created a much-needed buffer for prospective homebuyers scouting the market for suitable properties.
In June 2021 the average mortgage interest rate was a historically low 2.98 percent. This June interest rates spiked to 5.83 percent – a jump that translates into $1,000 more in monthly mortgage payments for the median home price of $557,250 in Greater Reno-Sparks, said Sarah Scattini, president of the Reno-Sparks Association of Realtors. At the lower interest rate, the mortgage payment for a loan of that size would be $2,343. That same home loan cut last month would be around $3,300 a month.
Current mortgage interest rates aren’t necessarily high, RSAR’s Scattini noted – they’ve simply returned to pre-pandemic numbers.
“How quickly we forgot that these are pre-pandemic (interest) rates,” Scattini told NNBW in an interview last week. “Over the last two years through COVID, we saw absolutely record low interest rates encouraging buyers to get out and buy now and start the home ownership process.
“Now, with rates adjusting upward, it takes away a little buying power because higher interest rates add to your mortgage (payment).”
The sudden shift in mortgage rates could spell doom for pre-approved new home buyers that went into contract when interest rates were lower but might struggle financially under the weight of those higher mortgage payments. That scenario has already played out at Sierra Nevada Properties, said owner/broker Darrell Plummer.
“I have had transactions fall out because the buyer was buying a new home, and the interest rates changed their affordability,” Plummer said. “They canceled with the new home builder, and they canceled their listing with us.”
The record low rates over the past few years fueled a buying frenzy across Reno-Sparks that was exacerbated by an extreme lack of inventory. Selling the same day as planting the “For Sale” sign in the front yard was commonplace, and sellers were besieged with multiple over-asking offers by hordes of house-hungry buyers.
Those frothy days appear to be in the rearview.
“Homes were on and off the market in a minute flat – you put the sign in the ground and it’s gone, and at substantially over asking price,” Scattini said. “The average days to contract was five to seven days.
“Now, we are seeing homes going into contract a little closer to the 30-day mark,” Scattini added. “The market is correcting to a more stabilized market.”
And that means that sellers may be forced to reduce high asking prices in order to sell their homes – a formerly unheard-of thought, Plummer said.
“We haven’t heard the words, ‘price reduction’ for several years,” he said. “When the average days to contract was five or six days, sellers were in total control and got everything and anything they wanted – buyers couldn’t ask for anything.”
Overall sales volume is expected to drop over the next two quarters as the market starts a slight shift in favor of home buyers, Scattini added. Sellers once again have started offering closing cost credits and other incentives – perks that were totally unheard of in 2020 and 2021 due to the low interest rates and fierce competition for properties.
“We are heading back into a buyer-side market,” Scattini said. “During the pandemic, there was no negotiating – it was all a sellers market, and you had to pay over asking, waive contingencies and appraisals. It was anything just to get a home. The roles are reversing. Buyers now have an opportunity to see what’s out there, and sellers are getting realistic (with pricing and incentives) knowing the market is shifting.”
It’s still going to take a herculean effort from builders to shift Northern Nevada into a true buyers’ market, though, Plummer said. Reno-Sparks will remain a strong sellers’ market due to the historically low supply of available homes. For perspective, a balanced market has about a six month’s supply of available homes; Reno-Sparks roughly one month’s inventory before interest rates started rising.
“You have to have a flood of inventory to get into a buyers’ market,” Plummer said. “It’s feeling like a buyers’ market because interest rates and uncertainty with inflation has buyers pausing.”
Scattini said that despite the hike in interest rates, it’s still a good time to buy – and homeowners can always refinance their mortgages when rates decline.
“The real estate market is cyclical, and there will be an opportunity to (refinance) down the road,” she said. “Buyers can still get in at great interest rates and find a property, and with homes on the market a little longer it gives buyers the opportunity to actually see different homes, go home and talk about them, process, and make educated decisions about which property best meets their needs.”
Kelly Wilmoth, vice president of construction and residential lending at Heritage Bank of Nevada, told NNBW that the spike in mortgage interest rates has scuttled much of the bank’s refinancing business. The slowdown in refinancing allowed Heritage Bank personnel to step back and fine-tune some internal processes, Wilmoth said.
“It was a good time for us to readjust, look at our existing model and see what we needed to make adjustments on,” she said. “It gave us some quiet time.
“People are going to have to adjust to the new normal,” Wilmoth added. “The last few years have been such an anomaly.”