There are quite a few variables to consider when selling your home when interest rates are rising. If that’s the only changing variable, you’re generally going to see a negative impact on both home sales and also on home prices. So, when interest rates rise, if all other factors remain somewhat constant, the number of potential buyers for your home is going to shrink.
In 2008, the Federal Reserve set rates at 0.25 percent because of the recession and the lack of buyer confidence or demand. Since 2008, buyer confidence and buyer demand have risen. In December 2015, rates climbed to 0.5 percent and continued to rise to where they are today (in 2018) at 1.5 percent. The Fed has commented that rates will likely rise to 2 percent in 2018 and then perhaps to 3 percent by 2020.
What Happens to the Ability to Sell Your Home With These Rises in Interest Rates?
If interest rates rise 1 percent and all other economic factors remain the same, purchasing power for homebuyers will decrease by just over 11 percent; therefore, every quarter-percent (0.25 percent) rise of interest rates reduces homebuyer purchasing power by 3 percent.
That means for a home purchase of $400,000, a 1 percent interest rate rise reduces buying power for the potential purchaser to just under $356,000. So, someone who may have been able to purchase your home with the lower interest rate, may no longer have the buying power to do so. This creates a smaller number of buyers, and thus less demand for your home. It may also increase the supply of homes, as fewer people are able to purchase those homes on the market.
If mortgage rates rise, it becomes more problematic for indecisive buyers to enter into the market, and thus in the short term, buyers may try to beat the rate increases - which will likely create a short-lived 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.
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 most likely will go up. If demand increases, home prices mostly likely will incrrease as well; however, if fewer people are looking to buy a home, then prices will likely decrease. As a seller, these are important factors to consider when putting your home on the market.
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. If 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 also an important variable in the equation. A buyer's debt-to-income ratio plays a larger factor in their ability to qualify for a mortgage than interest rates alone. When monthly income rises, the buyer's 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 percent 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. So, the percentage of a buyer's monthly income going toward monthly payments is still well below levels that analysts consider more risky.
Overall, we seem much more hesitant to take out mortgages than we have been in the past.
One of the most interesting situations I have seen as a Realtor in the last few years, is the percentage of all-cash transactions for home purchases. Even with interest rates at historic lows, the percentage of all-cash transactions is higher than normal because buyers seem to be more cautious about taking on debt than they were in past decades.
Recent high stock market gains allow people to diversify their percentage of assets. They often cash out their stock holdings, and reinvest in real estate to keep their portfolio balanced.
There is a much lower level of distressed properties, which is a result of a strong job environment. A secure job environment allows buyers to pay their mortgages without defaulting, while also helping to keep prices up even with a rise in interest rates.
While there is no doubting that interest rates play a large role in selling your home for the highest possible price, interest rates are in no way the only deciding factor. All of the factors I have mentioned above should be taken into consideration before you rush into selling your home because of high interest rates.
If you have any questions, on the role of rising interest rates in the local market, and the effect of those rising rates on the possible Selling Price and time period it may take to sell your home, don't hesitate to contact me at (843) 743-1025.