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Timing the Real Estate Market? Don't forget the impact of rising interest rates.

By
Real Estate Agent with Alain Pinel Realtors

Are you trying to time the real estate market?  Don't forget the impact of rising interest rates.

Many home buyers are struggling with the decision to purchase.  Are home prices at the bottom? Will they decline further?  Should we buy now or wait?  But there is another factor that many home buyers fail to consider when making their decision to buy or wait, the impact of rising interest rates

Mortgage lenders issue their loan approvals based on a Qualifying Monthly Payment which is typically the maximum payment at which the lender will provide your mortgage financing.  The qualifying monthly payment is on a seesaw between interest rates and home prices. 

Seesaw of Interest Rates and Home Prices

As interest rates rise, you will have to look at lower priced homes to qualify for your mortgage financing.



Let me give you an example, if you currently qualify to purchase a $430,000 home at an interest rate of 4.50%, the chart below demonstrates the loss of home buying power that results from rising rates.

Rising Interest Rates equals loss of Home Buying Power

 

 

 


An approximate "rule of thumb" to remember is that a 1% rise in interest rates equals a 10% loss of buying power.

 

Interest rates recently rose almost 1/2% in a short two weeks [this article was posted on 12/12/10].  Armed with your new Rule of Thumb, you know this results in a 5% loss of purchasing power.  Does that mean you should run out and buy a home RIGHT NOW?  That entirely depends on your price range and local real estate market.  In some price ranges and markets, the home prices have not only stabilized but are starting to rise. 

If you are a buyer in Contra Costa county of Northern California and DON'T KNOW if your price range has stabilized, sign up to receive a Buyer's Market Report and find out.  If you're outside my market, contact a professional Realtor in your area. Don't get hit with the Double Whammy of rising prices and rising interest rates.

Comments (4)

Lise Howe
Keller Williams Capital Properties - Washington, DC
Assoc. Broker in DC, MD, VA and attorney in DC

I was just showing homes this afternoon in the DC area and I said exactly this to my buyer.  He who hesitates is losing a lot of money right now! 

Dec 12, 2010 09:50 AM
Wendy Cutrufelli
Alain Pinel Realtors - Walnut Creek, CA
Contra Costa Realtor

Hi Lise,  Thanks for reading.  I don't think many homebuyers understand how dramatic the change in sales price can be due to rising interest rates and the rates can (and often do) change fairly quickly.

Dec 12, 2010 10:21 AM
Gary Pike
Better Homes and Gardens Real Estate Metro Brokers - Powder Springs, GA

Thanks for posting this, it should help the fence sitters get moving since they may start to feel they are losing out.  Higher interest rates are not necessarily completely bad if they spur demand.

Dec 12, 2010 10:23 AM
Wendy Cutrufelli
Alain Pinel Realtors - Walnut Creek, CA
Contra Costa Realtor

Gary, I understand fence sitters.  A lingering buyer fear is that they will purchase a home and lose value if the market continues to decline.  On one level, this is prudent concern for money.  But, sadly, many don't know to watch interest rates too.  If a buyer waits for an additional 5% decline in the market value but interest rates increase 1% during that same time (10% loss of purchasing power), the poor buyer STILL loses 5% because no one told them to watch the interest rates.  Education empowers buyers to make the best possible decision for their personal situation.

Dec 12, 2010 11:06 AM