How interest rates effect Home Sellers

By
Real Estate Sales Representative with Seek Real Estate BK3064913

In 2001 when I purchased my 1st home interest rates were 8%. My home purchase was $130,000. Today that same home sells for $400,000. 

Many if not most buyers purchase a home not based on the purchase price, but instead on the payments. Which is why over the last 10 years home sales have been very high... Interest rates were at historic lows. But the last 2 years were an anomaly. To keep the economy afloat, the government made the Federal interest rate ZERO Percent. This is money the federal government loans out to financial institutions, which they in tern lend to the public and other businesses. Those financial institutions charge a higher rate than what the government lends to them to turn a profit. Of course, if the borrower defaults on the loan, the lender is on the hook. But with rates at ZERO Percent, lenders were easily able to offer 2.5% and still make money. 

An important side note is that the average interest rate over the past 60 years was just about 8%. 

This week the Fed raised their rates .75% this comes after a .5% increase last month. As of today the average interest rate for a 30 year mortgage is 7.166% per Google. This is up from 5% just 45 days ago. 

So what does that mean for Sellers? Well, the 1st thing to know is home sales nationally are down drastically. Major mortgage companies are laying off loan officers and staff. Large real estate companies are doing the same.

Yes, there are still buyers shopping for a home, there always will be people who will buy and people who will sell regardless of the market. No, we are not yet in a buyers’ market, but that can happen very quickly.

There are 2 important factors as they relate to selling real estate. 

  1. Supply/Demand
  2. Affordability

So lets look at the facts comparing what a buyer who is financing the purchase could pay based on the monthly payment. 

 

4%

5%

6%

7%

8%

9%

10%

 $1,500

 $256,000

 $233,000

 $213,000

 $195,000

 $180,000

 $166,000

 $154,000

 $2,000

 $342,000

 $311,000

 $284,000

 $261,000

 $240,000

 $222,000

 $206,000

 $2,500

 $427,000

 $389,000

 $346,000

 $326,000

 $300,000

 $277,000

 $257,000

 $3,000

 $512,667

 $467,000

 $414,000

 $391,667

 $360,000

 $332,667

 $308,667

 $3,500

 $598,167

 $545,000

 $480,500

 $457,167

 $420,000

 $388,167

 $360,167

 $4,000

 $683,667

 $623,000

 $547,000

 $522,667

 $480,000

 $443,667

 $411,667

 $4,500

 $769,167

 $701,000

 $613,500

 $588,167

 $540,000

 $499,167

 $463,167

 $5,000

 $854,667

 $779,000

 $680,000

 $653,667

 $600,000

 $554,667

 $514,667

 $5,500

 $940,167

 $857,000

 $746,500

 $719,167

 $660,000

 $610,167

 $566,167

So, if there was a buyer who was looking for a maximum monthly payment of $2,500 (before taxes and insurance), when the interest rates were 4%, they would be able to purchase a home valued at $427,000. Today with rates over 7%, that same buyer can only purchase a home valued at $346,000.

While it is unclear what the long-term effects will be on the housing market, it is clear that home sales have already slowed, and it is expected that the number of available homes for sale will increase. This typically results in price competition from sellers (price reductions). Often the increased inventory allows buyers to have more control, where they can offer less and ask for more concessions (a buyers’ market). 

 

Comments (3)

Leanne Smith
Dirt Road Real Estate - Golden Valley, AZ
Relocation to NW AZ with elbow room & more freedom

The hard facts about interest rates and affordability.

Jun 16, 2022 01:58 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Joshua Farber the higher the interest rate, the higher the monthly mortgage payment, and less buying power for Buyers.

Jun 16, 2022 05:18 PM
Joshua Farber

That's exactly what I said. 

Jun 16, 2022 06:12 PM
Richard Weeks
Dallas, TX
REALTOR®, Broker

Great information, thanks for sharing.  I hope you have a great day.

Jun 17, 2022 03:15 AM