Rising Mortgage Rates

Whether you are thinking about buying or planning to sell, you must understand the role mortgage rates play on buyers' purchasing power, and sellers listing prices.

How the fluctuation in mortgage rates affects the two:

Buyers:

Mortgage rates directly affect the monthly payments buyers make on their home purchases. Even the smallest increases in mortgage rates can significantly impact their purchasing power. Typically speaking, for every 1% increase in mortgage rates, buyers lose 10% of their purchasing power. In other words, when rates increase, so do monthly payments forcing many buyers to purchase less expensive homes to make up for the difference in interest and vice versa. With rates currently increasing, buyers need to beware that further mortgage rate increases could potentially limit their future purchasing power. If you are in the process of buying a home, it is of the utmost importance to have a strong plan.

Sellers:

Rising mortgage rates result in a reduced number of overall buyers. With that said, we will likely begin to see the outrageous sales prices begin to decrease. Over the past couple of years, we have witnessed a strong sellers’ market coupled with mortgage rates at an all-time low. This gave buyers the ability to purchase more homes for low monthly payments. The limited inventory (homes for sale) resulted in wild selling prices. As buyers begin to get priced out of the market and mortgage rates begin to increase it will be of the utmost importance to carefully price your home for the market. You don’t want to risk coming out too high and getting stale or missing the opportunity to maximize interest. Skilled brokers will take into consideration and evaluate numerous factors when pricing expertly. It is not just the condition and location of the home, recent nearby sales, and price of similar homes currently on the market but also mortgage rates, buying power, and other local variables.

Freddie Mac is saying. “History suggests that when rates rise, there is an initial bump in home prices, as many moves quickly to buy a home before rates increase further. But after that period, home prices slowed. Freddie Mac's analysis shows that a 1% increase in mortgage rates results in home price appreciation that is four percentage points lower. For instance, a 1% increase in mortgage rates would change home price growth from 11% to 7%.”

Currently, the average 30-year fixed mortgage rate is above 5%. Experts anticipate that mortgage rates will continue to increase in the months ahead. If you are a buyer you have an opportunity to get in ahead of that increase by purchasing now.

Tip from the expert: You must get preapproved as early as possible to get today's rates locked in and prepare yourself with a plan in case rates are to go up. Additionally, sellers have a unique opportunity to still capitalize on the current situation if they are to list now before more buyers are completely priced out of the market and home prices are still strong. The graph below illustrates how mortgage interest rates drastically impact purchasing power and ultimately reduce the number of buyers bidding on homes in the higher price ranges.