Mortgage interest rates have been historically low for awhile now, which has been a big factor in this wild real estate market we have been experiencing.
Low interest rates have created both a surge of homeowners wanting to refinance as well as gave prospective home buyers more buying power.
Interest rates are one of many factors that impact the market, so with all the chatter around the FED raising rates, many are asking how that will shift the real estate market.
It’s not a question of ‘IF’ it will happen, but rather a question of ‘WHEN’’. Because of this pending shift, I wanted to take a moment to remind you of how interest rates directly impact a consumer’s buying power.
In this post, let’s talk about what an upward shift in rates could mean for the consumer. I also provide 3 tips for home buyers wanting to pick up the pace and lock in a house ASAP!
PITI - Principal, Interest, Tax, Insurance
First, let’s just refresh on what is included in your monthly mortgage payment. The acronym is PITI which stands for a Principal payment on the loan, the Interest payment on the loan, the property Taxes, and the home owners Insurance.
A lower interest rate provides a consumer higher buying power because it allows you to qualify for a higher loan amount. Once those interest rates begin to climb, that total monthly payment pushes up and the max loan amount a consumer will qualify for drops.
HERE IS AN EXAMPLE OF HOW INTEREST RATES IMPACT A MONTHLY PAYMENT:
We will consider just Principal and Interest for this basic example. Let’s assume a consumer is looking at a $500,000 home and plans to put 20% down. Here is how the monthly principal + interest payment shifts with different interest rates.
Purchase Price = $500,000
Loan Amount = $400,000
3.2% Interest Rate = $1,730 Monthly Principal + Interest
3.7% Interest Rate = $1,841 Monthly Principal + Interest
4.2% Interest Rate = $1,956 Monthly Principal + Interest
When will interest rates begin to increase?
That’s the magic question!
With many economic factors in consideration, there is no ‘set in stone’ date as when to expect the shift. Some experts predict rates will begin an upward climb as soon as November 2021. Most agree that by 2024 we will no longer be in this historic low interest rate territory.
What does this mean for Sellers?
When interest rates climb, the buyers willingness to pay premium prices will slow. Buyers will balk at the inflated values because they can no longer comfortably afford the monthly payments.
If you have considered selling your house, let’s look at the market in your neighborhood and discuss when the best time may be to list!
What does this mean for Buyers?
The sooner you can lock up an investment the better! The longer you wait to buy, the higher your payments may go.
Trust me… For those who have been actively looking… I get the low inventory struggle right now. Losing out on house after house after putting incredibly strong offers forward is beyond frustrating! Perhaps there are adjustments that can be made to your search. Let’s expand our thought process a bit and get you home (check out 3 tips below).
“I’m just going to sit tight and wait for the market to cool off…”
I completely get it… but I ask you to consider this… Home values will begin to balance back out as interest rates rise. Reference the above example of how higher interest rates impact your monthly payment. You may purchase at a lower price, but the higher rates next year could make your monthly payments equivalent to a higher purchase price this year.
For those waiting on a big home value correction…
A major correction may or may not happen to the extent you expect. I am not an expert economist, but my thought is that if we do see a correction, it will likely look different for different communities. Those high demand communities seeing the strongest inflations right now are high demand for a reason and may remain in high demand even with the higher rates.
I fully understand the stress and exhaustion of house hunting in this skewed market, but while waiting for the market to shift may help ease that battle ground environment, it may not actually provide financial savings.
HERE ARE 3 TIPS FOR HOME BUYERS READY TO TACKLE THIS MARKET!
TIP 1: ADJUST YOUR EXPECTATIONS
When I coach my buyers, we discuss the 80-10-10 rule of thumb. When analyzing your list of wants and needs a home has, we are looking for a house that meets 80% of that list. 10% of the list can be accomplished with some updating. The final 10% are items you are willing to let go. When we find a home that hits the 80-10-10, it’s a home run!
In a market where inventory is scarce, it may be best to adjust your expectations. Focus on homes that meet your top 3 absolute must haves and be more open minded about the other wants on that list. Maybe your rule of thumb adjusts more to 70-20-10…
TIP 2: LOOK AT OLDER INVENTORY
When we are in a hot Sellers Market, it’s easy to write off homes that have been sitting for a month or more. We assume something is wrong with these houses, however many of these homes are perfectly fine and sellers may have simply been too ambitious with their pricing.
Consider having a look at some older inventory that may be priced on the higher end of your budget and have your agent study the pricing to see if there is an opportunity there for you.
TIP 3: EXPAND YOUR SEARCH AREA
This goes against what I typically preach, which is to stay focused on a particular location and to NOT cast your net too wide. However, when inventory is such a challenge, it may benefit you to broaden that search area out a bit. Always stay true to your lifestyle and focus on communities that compliment your personal interests. However, I’ve seen buyers get stuck in a hyper focused location, that they miss beautiful homes in comparable communities.
Real Estate is an ever changing world! There is never a perfect time, but your real estate professional is staying educated on the current market and will adjust their guidance accordingly. Contact your trusted REALTOR to discuss your situation and what may be the best plan of action to accomplish your real estate goals.