What do rising interest rates mean to buyers & sellers?
There is good reason to believe that interest rates will continue to rise. It is expected that the Fed will likely increase the interest rate by 0.5% and 0.75% on Wednesday, Dec 14 when they complete their two-day meeting. And the Fed is expected to increase the interest rates twice more in 2017. As interest rates continue to rise, buyers and sellers should consider how this may affect them.
The main thing that buyers should consider, is that as interest rates climb, purchase power decreases. For example, if you were looking to purchase a $281,750 home, with a FHA loan, which is the FHA limit for Fresno County. A loan at the Fresno County limit, with 3% interest, would leave you with a monthly payment, with PMI, of around $1,701.10.
That same purchase price, with an interest rate at 4.31%, with PMI, would now run a monthly mortgage of $1,909.18. To keep your mortgage at $1,701.10 you would have to keep your purchase price at $243.000. In this scenerio your purchase power dropped by $38,750.
With average home prices in Clovis at $160 per sqft, your purchase at $281,750 with a 3% rate would buy you a 1760 sqft home. At 4.31%, in order to maintain the same mortgage payment, you could buy a 1518 sqft home. It becomes abundantly clear that a higher interest rate means that you are getting less home for the same mortgage payment.
Most fully expect interest rates to continue to climb. As they do, your purchase power will continue to fall, and the home you can afford at your desired mortgage payment continues to go down.
Seller’s should think about the same considerations with rising interest rates as buyers, with one added caveat. Along with less purchase power on the part of buyers, there is also a shrinking universe of buyers for your home. Let's say you want to sell your home at a sales price of $281,750.
For an easy thought experiment, imagine that there are 100 buyers that can afford your home, at a 3% interest rate, with a mortgage payment of $1701.93. As interest rates climb, there will be fewer buyers that can afford your home, due to the higher mortgage payment associated with a higher interest rate. Rather then 100 ready and qualified buyers, there now may only be 60 ready and qualified buyers for your home.
As the rates continue to climb, more buyers begin to peel off. As the universe of ready buyers for your home gets smaller and smaller, the seller is left with two unattractive choices. Either the seller is willing to wait for a buyer at the sellers desired selling price, which will likely take much longer than it did when interest rates were lower. Again this is because, when interest rates were lower, the universe of buyers was much larger. Or, unattractive option #2, is to lower the price so that there are more potential buyers, meaning a quicker sale.
At some point, I don't know what point that is, there will likely need to be a price correction, because interest rates may price out too many buyers.
What this means for both buyers and sellers, is that now is the time to buy and sell. Sellers can still sell for a price that gets them the best return, and buyers will likely get more home for their dollar than they may in a few months.
Read more about the Feds increase in interest rates here...
If you’re ready so am I…