An increase in interest rates would be bad news for buyers; when the Fed increases interest rates, mortgage rates tend to increase, and buyers find themselves paying more to borrow the same amount of money. It is less obvious what rising interest rates would mean to those trying to sell property – but a closer look shows that a rate hike would be equally distressing for sellers.
Before we talk about the effects of rate increases on a seller, let’s review what interest rates mean to a buyer. It is a common misconception that the Fed controls mortgage rates directly. In reality, the Fed controls the rates that it charges banks for loans. These rates help determine how “cheap” or “expensive” credit is to banking institutions. This can translate (indirectly) into “cheaper” or “more expensive” credit for the consumer (Read: mortgage rates). When mortgage rates go up, people have to pay more interest to borrow the same amount of money. The consequence is that they find themselves unable to afford homes that were within their reach before mortgages went up.
Now let’s look at what this means to you, the seller. Imagine that a buyer is looking at your property, and that your property is near the upper limit of what he can afford. Now, imagine that interest rates increase, and in turn, mortgage rates increase. Now, the buyer can no longer afford your property, and he disappears from your pool of potential purchasers. The market for your home has just shrunk due to the rate hike.
With fewer eligible buyers, you are less likely to sell your property in a timely manner, and less likely to get the price you expect.
Why does the Fed raise interest rates?
Interest rate hikes are the Feds main tool for controlling inflation. When the cost of basic commodities like fuel and food become unmanageable for the general public, the Fed may choose to raise interest rates to bolster the value of the dollar, so that money “goes farther” toward purchasing these things. When you hear about the skyrocketing cost of food and fuel, the Fed hears it too, and they feel pressure to raise interest rates.
July 18th, 2008 at 1:51 pm
There is no doubt that interest rates will increase. Buyers that are on the fence waiting for prices to drop will actually end up paying more if interest rates increase just 1% in relation to prices dropping 10%. Depending on the neighborhoods, I feel that prices will take a while before dropping 10%, especially with the unique real estate marketplace that we have here in Hawaii. At the same time, interest rates on mortgages will keep going up causing less buyers to qualify for the home that they could have bought.
Buyers should be buying when they financially can afford to especially if they find the right home and if it’s for themselves to live in. They should be more sensible to interest rates than sales prices for that is what will be paid month after month. In the long term, prices will appreciate over current prices and the sooner a buyer gets in the game, the sooner they will be able to take advantage of all the wealth building benefits a homeowner is entitled to. Don’t let opportunities pass you by!!!!