Higher rates have wide-ranging local effects

Sep. 10—When Rachel McCain and Paul Froke looked to move to Mankato from Texas a couple of months ago, they faced a tight housing market, rising interest rates and the challenges of purchasing a home remotely.

"We were fortunate. It's not a great time to buy a house for a lot of people, but we're happy it worked for us," said McCain, who is a family physician at Mayo Clinic Health System in Mankato, after finishing her residency in Texas.

Froke, her husband, works remotely for a transportation company.

"With our move up here, we were under a bit of a crunch to hit a deadline with her job starting here," Froke said. "The interest rates were up and the housing market was tight. We made two other offers on homes and didn't get them before we got this one," he said of their new home on Woodland Avenue in west Mankato.

The first-time homebuyers said their Realtor, Jen True, made the process easier as they looked at homes remotely.

"Jen was very helpful and navigated our need to buy and see the properties remotely. Every time we saw a house we were interested in she was able to help us see them (via video conferencing) and had a lot of insight into the neighborhoods," McCain said.

The couple had been renting in Texas and were able to save up enough for a sizable down payment.

The 30-year fixed mortgage rate is at 7.1%. It comes as the housing supply remains very tight and buyers are often having to offer more than the listing price.

The higher rates have cut into home sales locally. Year to date, the Mankato-North Mankato area has had 385 homes sold at an average price of $341,834, with homes being on the market for an average of 75 days before being sold.

Last year at this time there were 535 listings sold in the Mankato-North Mankato area with an average price of $321,252.

July home sales were down 17% compared to last July and the number of listings were down nearly 4% year over year.

True recently attended a National Association of Realtor conference in Chicago. "NAR Chief Economist Lawrence Yun predicts the rates to fall to 6% during the first quarter of 2024 and remain steady at 6% as the new normal," she said.

True said that while some buyers are getting priced out of the market, buyers are still looking.

"There's a saying that has been widely used lately: 'Date the rate and marry the house.' Basically, buy the house you love with a plan to refinance later," True said.

The higher interest rates have an impact on everything from home and vehicle sales to how much investors earn on bank CDs and the cost of loans for businesses.

Vehicles for cash

With interest rates on vehicle loans climbing from about 2% a couple of years ago to nearly 8% now, more buyers who have some money stashed are paying with cash.

"We're seeing people reverting to cash more often now than borrowing," said Jeff Wondra, general sales manager at Snell Motors in Mankato.

Snell has a lot of farmers buying pickups, and farmers have had several years of very high crop prices and record profits, meaning they have cash on hand.

"More than half our clients pay cash," Wondra said.

He said the higher interest rates have slashed the number of people leasing vehicles. When rates were low, people could lease a vehicle and pay significantly less per month than if they took out a conventional loan, but not anymore.

"Now about 5% of our business is leasing. A few years ago about 25% of our business was leasing."

Wondra said potential vehicle buyers are also seeing stricter requirements when they go to a bank for loans. "So people have to come up with more cash or they need a cosigner."

He said the higher interest rates have not impacted total volumes of sales nearly as much as he thought it would.

"People just decide they need or want a vehicle and they do it."

The number of vehicles sold in Mankato is significantly higher than last year, but Wondra said that is largely due to the fact auto dealers couldn't get inventory last year due to supply chain issues.

"Inventory is in a pretty good spot for us now," he said.

Change for banks

David Krause, CEO of Pioneer Bank, said some customers benefit from higher rates and many don't. And banks themselves have generally seen lower profits in the current environment.

"It's been very interesting. What the (Federal Reserve) did significantly and dramatically raising interest rates has hit banking margins," he said.

"I know the Fed's working hard to get inflation down and (raising rates is) probably their best tool to do that and there are some positive signs inflation is slowing down, but until the Fed lowers rates, there are effects on people."

Krause said the higher interest rates are positive for depositors who are putting money into certificates of deposit.

"Banks are paying over 5% on relatively short-term CD deposits."

But for those needing loans, particularly mortgages, the higher rates are a challenge.

"It costs them more and it's harder for them to qualify. People trying to move up (to a nicer home) and maybe can afford it are saying 'I have 3% or 4% on my current mortgage so why should I give that up?' And if they aren't moving up, there are fewer homes available for sale."

He said Pioneer Bank's farmer clients are also getting pinched. Farmers have been very successful in recent years, but commodity prices have been going down and inflation and higher equipment costs are hitting them at the same time borrowing money costs more.

Krause said he expects the impacts of higher rates will keep rolling out into the near future. Developers who built apartments or developments like strip malls borrowed money a few years ago at low rates with a balloon payment or readjustment in rates built in.

"When those loans are re-priced (at a significantly higher rate) in the near future, it could cause some issues. No one expected rates would go up as high and fast as they have."

While many consumers don't remember relatively high interest rates, Krause does. He started his first banking job in 1984.

"I was paying 9 1/2 % on interest-bearing checking accounts and I did home loans the first couple of years where the rates were over 10%."