Real Estate Broker · Helena, MT · Member since 2016 · 65 posts · 28 votes
As interest rates rise there will be decreased purchasing power. This automatically decreases the amount of house, duplex or whatever we can by (if a loan is required) based on the debt to income ratios that a bank often uses. So how much does it affect us? See graphs below!
The chart below is of the same thought, just the payment stays the same. Since we are a 'how much is the monthly payment' type of society, the chart shows that this drastically affects the amount of house that we can afford. Approximately a $2400 payment.
While this does not have a direct impact on the psychology of a buyer, it removes a purchaser from the market, or a price range, which will lower demand and (economic magic) will lower housing prices.
Why is this not the end of the world? Well when you bought, money was cheap, and your payment is still likely lower or similar to what you can purchase now and going forward.
Rising rates will not be the end of the world. Rates were once in the mid to high teens in the 80s. As the graphs illustrate, purchasing power will come down, and in order to balance the market, home prices should flatten or reduce accordingly as supply and demand work their magic. It may take some time to adjust to the new order, but over time I believe we'll all get used to it. People seem to forget that rates were in the mid 6's before the crash and that was only a decade ago.
This is a spherical horse in vacuum or the 'efficient market' which does not exist (hence all last Nobel prizes are about behavioral economics) . The real world is more complex. To get 80% of local price fluctuation you have to add at least next quantitative variables:
- real estate taxes appreciation rate,
- purchasing power (money left after immediate needs - taxes, insurances, food etc)
- net/reverse migratory stream,
- CPI,
- construction of new homes
Not to mention subjective variables:
- confidence (will i have enough money to pay the mortgage tomorrow?)
- expectations (will the equity dive or rise? will the rate spike higher or will it freeze on the level achieved?)
- social status (my third baby is born, now we need to buy a house no matter what)
I agree Alex, and that is why it is not a cut and dry interest rates rise = lower prices. But this could be the start of additional stress on a group of people that may have high consumer debt, which could be the tipping point for an increase in inventory, and decrease in prices.
Bob, I agree and said that it is not the end of the world. I think that people will still buy, still move, just that unbeknownst to them they will just qualify for a little less, which will, over time, lower demand, increase inventory and ultimately lower prices.