We have gotten a bit complacent about interest rates and their impact on real estate purchases. Low interest rates helped spur the revitalization of the housing market; which was one of the aims of the FED’s.program. But there are changes ahead and interest rates will rise…. the big question is when and by how much.
Whether you are a buyer or a seller, an upswing in interest rates will make a difference in your plans about buying or selling a Manhattan Beach-Beach Cities’ home. Even in a market where a large percentage of sales come with a hefty down payment or an all cash offer interest rates do make a difference.
I spoke with a lender last week who was offering jumbo fixed rate loans with 20% down up to $2,000,000 at 3.5%. There are a number of loans programs that allow lower down payments at rates around 4%-4.5%. Buyers and sellers have gotten spoiled with low rates. Many people don’t think they will see rates much above 5% but that may not be the case. Interest rates can be very volatile depending on the economy.
Interest rates affect both buyers and sellers. A 1 % rise in the interest rate is equivalent to about a 10% adjustment in the price of a home. As an example: on a $1,000,000 purchase a buyer would lose $100,000(10%) in purchasing power if rates rose from 4%-5%.. If rates rose 2% to say 6%, the decline in purchasing power for a buyer would be $200,000. In practical terms if the buyer was qualified for an $800,000 loan at 4%, the same buyer might only qualify for a $700,000 loan amount at 5% or a $600,000 loan at 6%.
At the upper end of the market, while qualification might not be a major issue, perception of value will be a factor. Make no mistake home prices could slide somewhat if rates shift upward. Buyers generally perceive current value based on future value. In an upward moving market buyers feel that paying slightly more today may be a good move if values will be higher in the near future. Using that same logic a buyer may not be willing to pay a higher price for a property in a market perceived as moving downward.
As interest rates rise, inventory will probably rise. More inventory means that buyers will have more choices available and sellers will have to adjust their prices to meet a different set of demands as the market changes.
The FED has noted that they will be raising rates sometime this year. Most forecasters thought it would not happen until after the summer but as the job market and overall economy continue to improve that timetable may move up. This may happen quickly if the FED perceives salaries are finally moving upward thereby pushing inflation to the target level they want to see. .
I don’t think the FED will allow rates to move upward too quickly, but I do see rates increasing by at least 1%-1.5% in coming months as the FED tries to manage the improving economic picture. In our area that may mean home prices begin to stabilize instead of moving upward as rapidly as they have been in the last year. A little breathing room in our market might be a good thing!
Have questions? Please feel free to call or e-mail me.