How Much Should Rising Interest Rates Influence Home Buyers?

Some of the most common questions that get asked of most Realtors are

• Will Housing Prices continue to go down?
• Will the appraised value of my house continue to fall?
• Are interest rates going to stay low?

Fact is, none of us know if appraised values of houses will continue to fall or if interest rates will go up or if the market has bottomed out.

In today’s NY Times, Nelson Schwartz (no relation) did a column entitled  “Consumers in U.S. Face the End of an Era of Cheap Credit. He talks about how we as American have spent the last 30 years or so watching interest rates basically trend downward. While there certainly have been fluctuations, let’s face it, rates, in all areas of credit have significantly lower than they were in the 1970s

I can remember buying my first home in 1979.  We had a variable rate mortgage that started out at 10.5% and had the potential to go up as much as a point per year.  The lender magnanimously capped the loan so that it would never exceed 17%.   We sold that house a few years later – the rate had climbed to around 13%.

This was the norm and we didn’t really think of it as a bad thing – it was just the way it was.

Today – we’re in a huge crisis, part of which is based on the fact that some variable loans have climbed from 5%  ALL THE WAY UP to 9% or so.

Needless to say, our attitudes about interest rates have changed. Mr. Schwartz indicates that many economists are saying these days are over.   Rates have “nowhere to go but up.”

For the last 3 years mortgage rates have gone up and down between the low 5% and the mid 4% range.   At the same time home buyers have been hesitating to buy homes because they are waiting for home prices to “bottom out”.

As of right now, in most markets, home prices are still dropping a bit, so this “wait and see ” attitude is still prevalent among potential buyers.   As a Realtor, I have a number of clients who have been looking at homes with me for more than a year – or more than two years.

Here’s the thing – if you “do the math”  rising interest rates might offset any continued drop in prices.  Here’s an example.

If you were to buy a home today for $250,000 and put $25,000 down you’d be borrowing $225,000. If that loan is for 30 years at current rates of around 5% your principal an interest payments will be $1207 per month.

If you hesitate on your purchase and wait 9 months, the house might indeed go down in price.  Let’s say it drops another 5% and the you can buy the house for $237,500.   If you put the same $25,000  down, your loan would be for $212,500.   If rates go up by just 1 point – to around 6%, your monthly principal and interest will be $1308.

So – in the end, you be buying at a lower price, but paying $100 more per month – and that additional amount is not adding to your equity – it’s all in interest.

Add to that the fact that if you wait and you also have a house to sell, your home will also likely drop another 5% in price.

So – in the end, you will not only not save money by waiting – you’ll actually be paying more – maybe considerably more.

Now – no one really knows what’s going to happen.  Prices could stabilize and interest rates could drop.  It’s all about educating your self on the market conditions and making the best decision you can.

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Rick Schwartz,   REALTOR

Homes for sale in Danbury, Bethel, Brookfield, Newtown, New Fairfield, New Milford, Ridgefield and Redding CT.