There are many economic variables to consider when selling your home, even more so when selling a home when interest rates are rising. If rising mortgage rates is the only changing economic variable, you’re generally going to see a negative impact on both home sales and home prices. This means as mortgage interest rates rise, the buyer pool for your home is going to shrink, and as this occurs less demand for homes will result in stagnation, or even a dip in home prices.
In 2008, the Federal Reserve reduced the FED Funds rate to 0.25% this in response to the recession and the lack of buyer confidence and demand for housing. Since then, buyer confidence and buyer demand have risen. In December 2015, the Fed raised rates to 0.5% and continued to increase them to where they are today at 2.25%. The Fed has advised they will continue to increase rates and will raise them to 2.5% in 2018, and up to 3% by 2020.
What Happens to the Ability to Sell Your Home With These Rises in Interest Rates?
If interest rates rise 1% and all other economic factors remain the same, purchasing power for home buyers will decrease by just over 11%; therefore, every quarter-percent (0.25%) rise of interest rates reduces home buyer purchasing power by 3%.
That means for a home purchase of $300,000, a 1% interest rate rise reduces buying power to just under $267,000. So, someone who qualifies to purchase your home today may no longer have the buying power to do so as rates rise, and even those buyers who can afford it may elect to spend less on their home as these rate increase impact more than just mortgage interest rates and rather they impact the cost of borrowing across the board. This creates a smaller buyer pool and less demand for your home, resulting in an increased supply this as fewer people are able to purchase homes, or simply delay their purchases to put more money down and/or buy down the interest rate on their loan. It’s also likely shift the balance of supply and demand and potentially the over all market from the current seller’s market, into a buyer’s market. See Is the Columbus Real Estate Market a Buyers or Sellers Market.
If mortgage rates rise, it becomes more probable for indecisive buyers to rush into the market, and the short term will likely see a decent boost; however, it could add extra pressure if rates continue to rise without leveling out.
While interest rates play a role in the housing market, there are a variety of personal and economic factors to consider, as well and rising interest rates tend to do exactly what they have been doing for the past few years, encouraging buyer to buy sooner in an effort to lock in rates before they rise further. Thus demand is pushed forward which eventually contributes to reduced future demand.
What Other Economic Factors Play a Role?
Supply and demand play crucial roles in determining the movement of home prices. If supply goes up, home prices go down. If supply goes down, home prices will probably go up. If demand increases, home prices mostly likely will as well; however, if fewer people are looking to buy homes, then prices will most likely decrease. As a seller, these are important factors to consider when putting your home on the market. For more info read Economics 101 – Supply and Demand as it Relates to Housing.
The sale of new homes is another factor to consider alongside rising interest rates because supply and demand will always play a factor in the home-buying process. Supply increases when new homes are created. Assuming that interest rates don’t rise too rapidly, paying attention to new-home inventory levels will give you an indication of what to expect as a seller.
Monthly income, as it relates to monthly mortgage payments, is a more important variable to gauge than interest rates alone. Your debt-to-income ratio plays a larger factor in your ability to qualify for a mortgage than interest rates alone. When monthly income rises, your ability to absorb higher interest rates does, as well. This means that as long as people are making more money, they’ll also be able to pay off any increase in debts.
When the real estate market crashed in 2007-2008, monthly payments of principal and interest were nearing 25% of the U.S. median family monthly income. Even with a rise in interest rates, Americans are currently seeing the highest monthly median income in the last 35 years. Because of this, the percentage of monthly income going toward monthly payments is still well below levels that analysts consider dangerous.
Overall, we seem much more hesitant to take out mortgages than we have been in the past.
One of the largest surprises is the percentage of all-cash transactions for home purchases. Even with interest rates at historic lows, the percentage of all-cash transactions is well above historical averages this as we’ve become more cautious about taking on debt than we have been in recent decades.
High stock market valuations allow people to diversify their percentage of assets, cash out and reinvest in real estate to keep their portfolio balanced.
The number of distressed properties is a result of a strong job environment. This allows folks to pay their mortgages without defaulting, while also helping to keep prices up even with a rise in interest rates.
While interest rates play a large factor in selling your home for top dollar, they’re in no way the only deciding factor. All of the factors mentioned above should be taken into consideration before you rush into selling your home because of high interest rates.
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 Marysville 43040 43041 New Albany 43054 Pickerington 43147 Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235