Rising Interest Rates Impact The Tallahassee Housing Market

The Federal Reserve raised its benchmark interest rate by .25% at the end of December. It also advised that additional interest rate increases were planned for 2019 as they anticipate the economy to continue improving. As we start the new year, lots of people are wondering how the increased federal funds rate will affect the real estate market.

It should be noted that the Federal Reserve does not determine mortgage interest rates directly. Instead, they set the interest rate at which banks and other financial institutions lend money to each other to meet mandated reserve levels. This, in turn, typically has an effect on short-term and adjustable mortgage interest rates. Even though the Fed rate increases do not always guarantee short-term mortgage interest rates will rise, the two rates are correlated over the long-term.

At this time, mortgage interest rates are close to the highest they have been since 2010. However, they are still significantly lower than the 50-year historical average of 8.25%. A simple regression to the mean analysis indicates that we can anticipate mortgage interest rates to increase over the next five years, and even more dramatically over the next 10 years.

Takeaways for Homebuyers

A person’s buying power can be significantly impacted by rising mortgage interest rates when it comes to purchasing a home. For example, at current mortgage interest rates, a homebuyer who plans to have a $1,587 monthly payment can take out a loan of about $300,000. If you increase mortgage interest rates by only half a percent, their borrowing power is lowered to $284,000.

Almost all experts are in consensus that mortgage interest rates will most likely increase by at least half a percentage point in 2019. Although the increases may not occur early in the year, homebuyers should anticipate them and utilize this information to make informed purchase decisions.

Homebuyers should also expect home prices to continue rising. With the Tallahassee housing market slowing down somewhat and the anticipated interest rate increases, some homebuyers may be hoping for prices to fall. Unfortunately, home inventory levels are still fairly low, which means there will be less price pressure for sellers, particularly in the highest demand price ranges.   

If buying a home is in your near future, use this information to make an intentional decision about your home purchase timeline. If you already own a home that you are considering selling, changes in homes values should be a factor that you think about. Speak with a real estate agent who is knowledgeable about market movements and experienced in home evaluations to develop a strategic home buying and/or selling plan.