Interest rates are about to start a long slow upward trend. Will increasing interest rates effect sellers in this market? Absolutely and much more than most home sellers realize. I’ll explain why here and provide some solid evidence for your consideration if you hope to sell your home. Obviously, this has great relevance to buyers, too. Buyer’s know it’s a buyer’s market, but many sellers don’t realize how much money they could lose if they don’t sell now while interest rates are still at historical lows. We all know that timing is everything, but that has never been more true than it is now for sellers. Here is the main argument I make: As interest rates increase, in order for a buyer to pay the same maximum monthly mortgage payment, the price of the home will have to decrease. This is similar to the inverse relationship of bond prices and interest rates.
Interest Rates on an Upward Climb
Exactly when and how far mortgage interest rates will rise is unknown, but expert after reliable expert is predicting increasing interest rates. The logic is beyond argument. Federal, state, and municipal debts rage out of control. Eleven states are on the verge of a financial crisis and possibly bankruptcy. U.S. Bonds are at risk and major International buyers have registered their concerns in the markets. The Feds are printing money with nothing to back up the dollar. Spending is out of control but has reached epic proportions of irresponsibility. So much for a rational fiscal policy. The Federal Reserve arguably has lost its grip on monetary policy. Banks and mortgage companies are on edge and have cut their loan portfolios to a fraction of what they were. Buyers who are qualified have trouble satisfying ridiculous underwriter requirements. Freddie Mac and Fannie Mae are disasters and part of the problem. Politicians have handicapped appraisers with laws that actually do the opposite of what they claimed they would do to help buyers and sellers. There is a large shadow inventory of foreclosures that will increase the total inventory of homes for sale.
In this chart above, the point is made this way. Today a home with a loan of $450,000 at current interest rates of 4.75% would cost a buyer $2,347 a month. If that is the maximum loan the buyer qualifies for, or if that is the buyer’s personal budget maximum, the price of the home must decrease as interest rates increase. Of course, if the seller is unwilling to reduce the price, this buyer simply does not buy. As you can see in this chart if interest rates increase from 4.75% to just 5%, the equivalent selling price drops from $450,000 to $445,000. Carry that to an interest rate of 7% and the selling price drops to $352,000. That’s a pretty big loss for the seller.
Interest Rates Are Key
This chart demonstrates the same concept for increasing interest rates, but the chart shows the actual loss in equity (or selling proceeds). The numbers are in thousands. All of this means the buyer’s market will become even more of a buyer’s market. It also means homeowners who want or need to sell must pay close attention to the timing and strategy for the sale of their home. The point of this article is that among the many variables to consider, interest rates are about to begin increasing, and that alone will steal equity from sellers, because to sell, they will have to reduce their prices.
Interest Rates Kill Equity
A seller has a couple of logical options in this market and given the high probability that interest rates will increase. Number one, he can do everything possible to sell now at a very reasonable price before he loses money as interest rates increase. Number two, he can chose not to sell and hold onto his house for five to seven years as the market recovers, assuming that he has that financial option. Number three, he can conclude that I’m all wet and ignore all the data. Maybe he’ll get lucky. Or not.
I’ll add this small note from 30 years in the real estate school of hard knocks: Home sellers need knowledgeable and experienced professional real estate agents now more than ever. I hope if you are trying to sell your home, you will call me up and invite me over for a cup of coffee and an interview.
These are tough times, and tough times call for hard decisions. I hope this article helps in some small way for home sellers who understand that interest rates are going to begin increasing soon.
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