How Does This Unpredictable Housing Market Affect My Divorce?

We’ve all heard about interest rates rising, home prices teetering, and the volatility of the housing market, but what’s happening behind the headlines that impacts one of your most valuable assets — your house?

To illustrate the severity of rates on the market, consider some of these statistics:

The mortgage payment for a $500,000 home in the beginning of 2022 at a 3.25% interest rate would have been roughly $1,740 per month. Today, that same $500,000 home at the current rate of 6.85% increases the payment by 50% to $2,621.

Rate Source: Bankrate

The above is based on 20% down, 30-year fixed, principle & interest only mortgage (no property taxes).

This illustrates the impact of rates on buying power, which impacts property values. Buyers are qualified for mortgages based on the monthly payment — that’s how buyers budget and how lenders assess risk.

So, in order for those same buyers to qualify and afford the same home they could earlier in the year, home prices would need to be reduced by 33.6%.

This means that, assuming terms are equivalent, a $500,000 home needs to be purchased at $332,000 in order to have the same payment as the first of the year

You can do the math on what this means if you want to buy out your spouse’s equity and stay in the marital home. What was affordable when interest rates were 3.25% will not be affordable if interest rates are 6.75%!

Here are some things I am keeping in mind right now when thinking about how to best decide what to do with a marital home:

Pricing:
In a volatile market, data becomes irrelevant within days. We must keep our finger on the pulse of today’s supply and demand, which can only be seen by looking and pending listings and the number of showing. Data about properties that recently sold should be used as a basis to reduce the list price, not as a basis to support a value. This figure will adjust each month that we get new data.

Price Reductions:
The kiss of death in maximizing home values is to allow the house to sit on the market. Each day that goes by erodes the value as depreciation stacks up. Updating values for an active listing should be done weekly.

Condition:
Demand has plunged. This means buyers can be persnickety. The pendulum has made a full swing from a seller’s favor to a buyer’s favor. Curb appeal, immaculate cleanliness, well staged, decluttered — these are all not just nice-to-haves, but requirements of obtaining the highest value. If these things aren’t possible in a struggling case, then expect the house’s value to take a substantial hit.

Days on Market:
While we’ve all been used to multiple offers within the blink of an eye, those days are gone. Expect that listings can take weeks to sell, which feels like an eternity. Again, pricing and condition will directly impact this, but even with those in check, it can take longer than usual.

Closing Costs / Buyer Incentives:
We are moving into a market where buyers are demanding closing costs to be paid by the seller. And in today’s rate climate, sellers are often buying down the buyer’s interest rate, which can protect the home’s value since it lowers their payment.

Here is the advice I am giving my clients about their marital home:

1. Set realistic expectations.
2. Update values. I wouldn’t bank on a valuation that’s more than 30 days old.
3. Rethink buyouts. Any client who has a mortgage preapproval based on an old rate that hasn’t been locked in should get an updated approval to determine if a buyout is still viable.
4. Leave real estate terms out of court orders. By real estate terms, I mean list price, price reductions, and other terms that are addressed in listing and purchase agreements. We need to be able to pivot and not be constrained by limits that have been placed in orders without the input of a real estate expert.