Economic projections indicate that the Federal Reserve could raise interest rates three times in 2019 and at least one time in 2020. But that might not be as bad as it sounds. If interest rates are rising, that typically indicates a robust economy.
A strong economy means that homebuyers are most likely seeing larger bonuses, increases in salary, and overall stability in the job market, making them more inclined to purchase a new home. However, with interest rates on the rise, buyers might also feel the urgency to buy a home before mortgage rates become too high.
[Read: 6 Do’s and Don’ts for Selling Your First Home.]
Does that mean I should buy or sell now?
When buying or selling a home, you’ll always want to consider a number of factors including: Where are interest rates at and where are they heading? What’s my plan? What’s my motivation behind the decision? Where are we in the real estate cycle?
If you are feeling rushed due to changing interest rates and think you need to lock in a deal before it’s too late, please take a moment to catch your breath. Buying a home will be one of the most important purchases you may ever experience, and you do not want to rush into something too fast. Once you’re confident you’re ready, that’s when it’s time to pull the trigger.
So what do rising Interest rates mean for home sales?
Buyers tend to go into a frenzy at the thought of interest rates rising. Real estate agents, financial consultants, friends and family all seem to be saying the same thing: buy now. However, the relationship between interest rate increases and the housing market is quite complex.
Rising rates might put pressure on buyers to find a home sooner rather than later to ensure they get a home that fits their needs at a manageable interest rate.
When interest rates begin to creep up with a future outlook of a continued rise, buyers will flock to the market before eventually cooling off. As rates continue to rise a buyer’s purchasing power will go down. For those that aren’t sure if they have a large enough down payment, something to consider could be using your 401k to buy a home.
[See: 9 Details That Signal a Home Is a Good Buy.]
When interest rates rise, purchasing power goes down.
If you are fully prepared to sell your home, do so before rates spike significantly. Fewer folks will be able to afford your home as interest rates rise, therefore it may decrease the value of your home.
Buyers might also wait until they have more money saved toward a down payment so that their monthly mortgage payment will be less. However, depending on your market, rising rates could also have a positive impact on the sale of your home.
As aforementioned, rising rates indicate a strong economy. Employment is strong and steady and employees are seeing higher bonuses and salaries each year. As salaries and bonuses increase, buyers might feel more comfortable purchasing a larger home. They might have more money to put toward the down payment, leading to a lower monthly mortgage payment.
Add all of these variables together and the housing market becomes hard to predict. Demand typically weakens as interest rates rise because homeowners are fearful they won’t get top dollar for their house. But buyers can also become more prevalent during the initial period of rising interest rates because they want to secure a new home before rates become higher than they can afford, leading to high demand by anxious buyers and decreased inventory by nervous sellers.
[Read: 4 Housing Markets That Haven’t Recovered From the Great Recession.]
Rising interest rates and what to expect.
If you’re feeling the pressure of rising interest rates, keep this mind: Interest rates aren’t going to increase by a drastic amount all at once. Realistically, the Fed won’t increase the Federal Funds rate by more than 4 percent in the next couple years. In fact, they probably won’t even come close to a 4 percent increase.
Looking at the last 30 years or so, Americans have endured much more volatile interest rate changes by the Fed, according to historical data charted by Advisor Perspectives’ market and economic trends analysis team dshort. From 1987 to 1988, the Federal Reserve raised rates from 6 percent to nearly 10 percent. Between 1994 and 1996, the Federal Reserve increased rates from 3 percent to 6 percent. From 2004 to 2007, the Federal Reserve took rates from around 1 percent to 5.25 percent before home sales started dropping in 2007 at the start of the housing market crash.
In short, don’t fear. Take your time, conduct the necessary research and ensure that you are fully prepared to buy or sell a home before signing on the dotted line. Making hasty decisions could have very significant, detrimental impacts down the line, so it is important to always think through your investment decisions carefully, despite what the media and your friends and family are saying.
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What Happens to Home Sales When Interest Rates Rise? originally appeared on usnews.com
