Higher Interest Rates ⇒ Less Purchasing Power ⇒ Less Qualified Buyers ⇒ Lower Home Value
I warned that as the Fed raised interest rates, buyers would be priced out of homes that they could qualify for now, and that as those buyers got priced out of certain homes, sellers with higher-end homes would lose value and not be able to capture top dollar for their homes.
I wrote that article 8 months ago, and now it's starting to happen. While there's no arguing that this summer was one of the hottest real estate markets in recent history, the hot real estate market now appears to be going, going, but not quite gone yet.
There are still some hot areas, and you will still hear some stories of multiple-offer situations or homes selling in a matter of days, but the feeding frenzy that everyone witnessed this past year is done.
Interest rates are now around 5% (yes, you will still see quotes for 4.75% on 30-yr fixed, if you are putting 20% down and have sterling credit), and that rise from 4% this time last year to 5% today has cost buyers over $50,000 - a buyer last fall at a 4% interest rate could afford to finance $50,000 more than a buyer today at 5%.
A $50,000 reduction in purchasing power puts a buyer a completely different house bracket and possibly a different area. Home values in our area tend to be segmented in $25,000 increments according to their features and location. Losing the ability to finance an additional $50K in house price may mean that buyer is no longer going to get that basement he wanted or the 3-car garage is now off the wishlist or a particular area or neighborhood is now out of reach.
If you're a seller, that means your house has lost value too. The value of a home is directly tied to what you can sell it for, and that is directly tied to what a buyer can pay for it.
I have encountered a lot of high-end sellers lately that are struggling with the loss of value of their homes that less than a year ago were worth $50,000 or $75,000 or $100,000 more than they are today. I consulted with a doctor last month about selling his beautiful home after he and his wife had relocated to Florida. He thought their home was worth about $800K - and it probably was - last year. I had to break the bad news to him that his house was now probably only worth $725K. He didn't like hearing that and has decided to try to sell it himself on Zillow.
I wished him luck and gently reminded him that with every quarter point rise in interest rates, he was going to lose more value, not including the cost of carrying and maintaining two homes and trying to sell a home from 1800 miles away. We parted on good terms, but as our conversation ended, I couldn't help feeling sorry for the guy. It's always hard to accept when you've missed out on the market - whether it's a hot stock that you didn't buy, an investment opportunity that you passed on, etc.
But as I tell my clients, both buyers and sellers, it's not too late. Fall and winter are great times to pick up a deal for buyers, and a great time to sell your home because there is less competition in the marketplace. And interest rates are still hovering around 5%. So, please, if you are thinking of selling or buying, get in NOW.
As a mentor of mine used to say, "A good plan today is better than the perfect plan tomorrow." And I promise, the deal you cut today on buying or selling a home WILL be better than the deal you cut tomorrow.
Chris Camperelli has been in real estate in the Indianapolis area for over 25 years, representing buyers, sellers, developers and builders. He and his team have been in the top 1% of realtors nationwide since 2010. Chris is married with two children and considers his family to be his greatest achievement. When Chris isn't selling real estate, he is playing with his kids and helping his wife with her start-up vineyard and winery.