The chatter about interest rates has been nagging us for years now:
“Interest rates are historically low!”
“Refinance Now!”
Then…
“The FED raised Rates Again!”
“Rates are now at their highest point in decades!”
Then…
“Inflation is slowing!”
“Rates are falling!”
My 12 year old is learning about interest in her math class. I love that this is being taught because there are many adults that do not fully understand how interest works and how it impacts the real estate market.
I’m going to try to touch on some bare basics to help explain why all the interest rate buzz is so important to pay attention to for home buyers AND those considering a home sale.
PITI
I explained to my 12 year old that when buying a house, most people will borrow money from the bank (obtain a mortgage). The bank won’t just hand over the money for you to use for free! They will expect you to pay the money back PLUS pay them interest on the loan as a fee for using their money.
As a reminder, a homeowner’s monthly payment includes:
Loan Principal + Loan Interest + Property Taxes + Homeowner’s Insurance
The interest rate can significantly skew that total monthly payment as I show in the brief video below. Simply put: The lower the rate, the lower the monthly payment. As rates go up, the monthly payment goes up.
For most homebuyers, the monthly payment is the most important factor when buying a property.
BUDGET
A rule of thumb is that you should spend NO MORE than 28% of your monthly gross income on your PITI payment.
When considering a home purchase, step one is always to chat with a local mortgage professional to determine what you can afford. For preliminary research, there are online calculators such as this one: Chase Affordability Calculator
CONSIDERING National Averages
In 2023, a comfortable monthly payment for the Average American Household would be around $1,750 per month (based on the Average American Household Income).
The Average National Home Sale Price is currently around $415,000.
With a 20% downpayment on a $415,000 home, with interest rates around 7.25%, the monthly payment is around $2,700.
Let’s look at an example:
NOTE TO HOME SELLERS!!
Many who are preparing to sell their property are looking at comparable sales from when rates were lower. While taking these sales into consideration is fair, the Buyers who were bidding on your neighbors home are in a MUCH DIFFERENT financial position now and likely less willing to stretch to the same price!
Remember: Market Value = The Price a Buyer is willing to pay in the current market
When rates are lower, the Buyer has the ability to push the purchase price up and stay within their monthly budget. When we saw rates jump rapidly, it significantly impacted how much Buyers were able to borrow from the bank. Maximum budgets dropped and the willingness/ability to pay inflated prices dropped.
The good news for Sellers is that with inventory remaining low, we are still seeing enough Buyers paying close to the list price. It is still a great time to Sell, but it is important to be aware of the shift when preparing and pricing a home.
Need Help Preparing You Home For Sale? Check out HomePrep
Many factors play into the real estate market conditions: housing inventory, buyer demand, world events, national economy, inflation, employment rates…
It is never a ‘bad’ time to buy or sell real estate! There may be added challenges as we experience shifts, but we simply react to the conditions and adjust the strategy.
Reach out to your real estate advisor and begin to put together a plan on how to capitalize on the current market!