In real estate, we talk a lot about interest rates because they affect EVERYTHING!
But I’d like to challenge your preconceived notions about interest rates and show you why, even
as home prices are higher AND interest rates are going up, if you’re wanting to make a move in
the next 5 years – NOW is the time to act.
First, let’s talk about “buying power.” Buying power is the total amount of money you have
available each month for a mortgage payment. Any money you’ve saved for a down payment,
the proceeds from the sale of your current home, if applicable, and the amount of money you’re
qualified to borrow all impact your buying power. This means that as interest rates go up, you’ll
spend the same amount of money for less of a house.
See, when people talk about interest rates, we usually think that increased rates equals a higher
monthly payment. And while that is definitely true, let’s flip this on its head and START with your
current budget for a mortgage payment. If you begin here and work backwards, you can get a
sense of how powerful interest rates can be when determining the amount of house you can
afford.
Take a look at this example, and let’s start on the right side of the table. Let’s say you have a
monthly budget of around $1,900 for a mortgage payment. With a similar down payment, and
an increase of just 1% in the interest rate, you would lose an additional $50,000 in buying
power.
And as we look at interest rates over the last 40 years, we see that even though rates are going
up, they’re around average for the last several decades. If you’re a buyer, this means that right
now, you’ll get MORE house for your budget than you likely will in the next 5 years. Plus, if
you’re currently renting, waiting longer to purchase means paying more to your landlord versus
building equity for yourself.
Finally, if you’re a seller, just know that your pool of buyers is still large enough to net you great
proceeds on your home. However, if interest rates continue to rise over the next 5 years – which
looks extremely likely – your pool of buyers will become smaller.
As much as people hate to hear it, it’s unlikely home prices are coming down dramatically any
time soon. Prices will most likely level off and stop rising so quickly, but a significant drop in
price is not likely. What IS happening, and will continue to happen, is a rise in interest rates. As
those rates go up over the next few years, it means buyers will simply be able to afford less
house, and there will be fewer buyers around for sellers.
Want to chat further about YOUR personal situation? Shoot me a message and let’s figure out
what works best for YOU.
