Federal Reserve hikes interest rates amid a shift in OKC's housing market. What to know

If the spike in interest rates turns around the sellers' market for homes and puts buyers back in charge, the boom will have gone out with a bang in Oklahoma City, not a wheeze.

Not that a turnaround is imminent.

In May, even after several weeks of rising mortgage rates, buyers were still paying more than sellers were asking, and at the highest rate ever. On average, buyers paid 102.2% of listing price, according to the Oklahoma City Metro Association of Realtors.

And they still are, according to local real estate agents, but the market is turning. It was turning even before the Federal Reserve sent shock waves through the economy, not just housing, with the third rate hike this year and the biggest one in 28 years.

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How the Fed rate hike affects home mortgages

However, the Federal Reserve did not raise mortgage interest rates. Its Federal Open Market Committee raised the federal funds rate — the interest that banks charge one another for overnight loans to meet reserve requirements — by 3/4 of a percent.

The Fed's action won't directly affect standard mortgage rates, but borrowers will pay higher interest on adjustable-rate mortgages, home equity lines of credit, credit card debt and other variable-rate loans that are tied to the federal funds rate, said Brian Henderson, chief investment officer for BOK Financial.

Businesses with variable-rate loans, such as revolving lines of credit for financing equipment, will also experience rate hikes, Henderson said.

But not home buyers, at least not directly because of the Fed. The Fed raised the federal funds rate to fight inflation, which at 8.6% is the highest in a generation, not to tamp down the housing market.

Inflation was already starting to take care of that with rising home loan rates.

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Since December, the monthly payment on a $300,000 mortgage — the traditional 30-year, fixed-rate loan — has risen from $1,265 to $1,800, according to the National Association of Realtors.

The rising cost of borrowing means buyers can afford less of a house when they buy, and some people, priced out of the market, can't buy at all.

In the Oklahoma City-area market, the number of homes newly listed for sale was up 17.5% last month and sales were virtually flat compared with May of last year, according to the Metro Association of Realtors.

The increase in listings as sales remained flat pushed the supply of homes for sale through Realtors up 41.7%, enough to last one month, up from 21 days a year ago.

"We are starting to feel a slow shift in the market but the 'shift' is actually normalizing the market," said Amanda Kirkpatrick-Lawler, broker-owner of Metro Mark Real Estate. "We are still in a sellers market, but sellers are starting to be more realistic than before."

Homes are still selling quickly — in just two weeks on average, according to the Realtors — "but with less competition," Kirkpatrick-Lawler said.

But not much less, said Will Flanagan, managing partner of Kevo Properties.

"I've seen multiple offers still being the norm, with (buyers having to meet) appraisal gaps being the necessity," he said.

An appraisal gap is when a property appraisal comes in for less than an agreed-upon sale price, meaning the appraiser determined the home to be worth less than a lender was willing to loan someone to buy it.

A sale can proceed if the purchase contract includes an appraisal gap clause, which guarantees that the buyer will come up with the money to cover the difference.

"In my experience, if you're not writing an offer that is well over list price with an appraisal gap, proof of funds, and preferably an as-is offer, you are going to be up against stiff competition," Flanagan said.

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Challenges facing homebuyers and sellers

Nationally, home sales are trending down "towards 2019 figures," said Lawrence Yun, chief economist for the National Association of Realtors.

"Sales could fall even further with some inventory sitting on the market for more than a month like in the pre-pandemic days," Yun said this week in response to the Fed's raising the overnight bank loan rate to fight inflation. "Pricing a listed home properly will, therefore, be the key to attracting buyers.

"In the meantime, rental demand will strengthen along with rents. Only when consumer price inflation tops out and starts to fall will mortgage rates stabilize or even decline a bit."

Flanagan said rising rates have some would-be buyers flipping out — not flipping, as in buying a house, touching it up, and selling it at a profit.

"A lot of buyers are disheartened right now with the current market and they're in somewhat of a scramble now the interest rates are rising," he said, "but it is not impossible to secure a contract on a new house."

The market still holds challenges for buyers, and some sellers, he said.

"I've had clients that approached me wanting to make a list price offer, which at this point may as well be considered a lowball offer," Flanagan said. "Obviously this all depends on the house, the condition, the area, etc."

Some sellers, he said, "especially FSBO (for-sale-by-owner) sellers," seem to be pricing their homes way too high to attract any buy.

"While we all understand the market is hot, and if you price your house at fair market value you will go into multiple offers, some sellers are tacking on an extra 10 to 15% on the front end, and wondering why the house doesn't sell," Flanagan said.

Kirkpatrick-Lawler said she hopes would-be buyers realize how inexpensive mortgage rates still are despite being on the rise.

"While the rising interest rates change affordability for some entry-level home buyers, the rates are not high compared to the average historical rate," she said. "Home prices continue to appreciate and are projected to continue appreciating but at a slower pace than what we've been seeing over the past few unprecedented years."

The median sale price here in May was $270,000, up 15.3% compared with May of 2021, the Realtors said.

"Home buyer demand remains higher than supply, which will maintain and increase home prices going forward. Real estate remains a strong investment  and it is still a great time to buy," Kirkpatrick-Lawler said.

Senior business writer Richard Mize has covered housing, construction, commercial real estate, and related topics for the newspaper and Oklahoman.com since 1999. Contact him at rmize@oklahoman.com.

This article originally appeared on Oklahoman: Fed rate hike is not a mortgage rate increase; OKC home sales hold up