What Happens if Interest Rates Rise?
We get a lot of questions from buyers – especially recently – about waiting to buy. Some are a little nervous and think that prices will drop and want to know why they shouldn’t wait since they think a correction is coming. Many overlook the impact that interest rates have on your total home purchase price.
First of all, nobody really knows if and when prices will drop. They have been going up in our area roughly 2-4% per year for the last several years. We did have a 10% drop in 2008/2009, but we quickly recovered, that was really the worst case we’ve seen in several decades.
What I like to ask is what happens if interest rates rise? I feel like that is a far more likely scenario. Currently, a 30-year mortgage rate is at 3.5%, it was only a few short years ago that the mortgage interest rate was 6%. I remember feeling great about locking in a 6.25% interest rate on my condo in Clarendon, and that wasn’t that long ago.
For every half point that interest rates rise, your purchasing power decreases by 6%. So effectively, a half percent rise in interest is equal to a 6% rise in price. If rates were to go back to that 6% level where they were only 5-6 years ago, your effective cost of the property would jump up 33%.
Although prices might fall, your guess is as good as mine and people have been waiting for that for several years now.
The far more dangerous scenario is an interest rate increase.
Just a 1% increase, back to about 5%, would be equivalent to a 12% increase in price.
For first time home buyers and people who are new to the area often will get sticker shock, but the math simply states the risk of interest rate increase far outweighs any potential downturn in price.
If you have any specific questions about this, or any other real estate related questions, please feel free to let us know.