How does a 1% Interest rate increase affect buyers and sellers?
It doesn’t seem like a whole lot at first glance, so let’s take a look at some numbers.
Let’s make some basic assumptions:
- 200k List Price
- 1% Rate Increase (from 4%-5%)
Let’s say we have a customer that is approved with a 4% Loan and based on their debt to income ratio, they can afford a home priced at $200,000. If the rate rises to 5%, that customer’s affordability would drop from $200k to about $175k (we will use $25k as the number for the remainder of the article). There are, of course other factors like HOA, Insurance for the particular area and so on.
What does this mean to sellers?
The weight of this impact is absorbed by sellers. Yes, the buyers pay more interest over time, but their monthly payment does not change. Local income levels will not just increase overnight and the Federal Reserve, in order to stave off inflation, continues to slowly raise the rate, as they should with falling unemployment. While it will have an impact, this doesn’t necessarily mean that the seller listed at $200k, would have to sell at $175k, but the market will constrict to more normal levels, and sellers should expect to sell a slightly lower prices, it will take time for the market to shift it’s “affordability” meter. Sellers in higher price points will see the most dramatic shifts.
We are currently in a STRONG seller’s market, meaning that there is substantially less than 6 months of available inventory. So why are sellers not selling? There’s not enough inventory available for them to move to once they sell their homes, putting them in a catch 22.
What does this mean to buyers?
For buyers, the math is substantially simpler. The payment will stay the same, but the home that you could buy today at $200k has now fallen into the ‘out of budget’ list. Will the 200k sellers eventually drop to $175k? Maybe, but the buyers at $225k have now replaced that original $200k market and depending on their timeframes, the sellers may not NEED to shift as dramatically. Again, we use the 200k price range because it’s the most common, higher price points will see a more significant constriction if interest rates take a 1% hike by the end of 2018.