What Happens to Home Prices when Interest Rates Rise 

There are many economic variables to consider when selling your home when interest rates are rising. If that’s the only changing economic variable, you’re generally going to see a negative impact on both home sales and home prices. This means as interest rates rise, the buyer pool for your home is going to shrink.

In 2008, The Federal Reserve (FED )set rates at 0.25 percent because of the recession and the lack of buyer confidence or demand. Since then, buyer confidence and buyer demand have risen. In December 2015 rates climbed to 0.5 percent and rose to 1.5 percent on December 13th 2017 and continued to   rise to where they are today at 2.5 percent. It's predicted the Fed rates will rise to 3.0 percent by 2020.

This rate directly influences other short-term interest rates such as deposits, bank loans, credit card interest rates, and adjustable-rate mortgages. By lowering the fed funds rate so dramatically during the 2008 financial crisis, the Fed kept funds available for banks; signaling to financial markets that the Fed would act decisively to keep banks functioning.. 

How Interest Rates are Determined

The fed funds rate is the most significant leading economic indicator in the world. Its importance is psychological as well as financial. In fact, the only two rates it directly impacts are the prime lending rate and adjustable rate mortgages. The yield on the 10-year Treasury note determines conventional mortgage rates.

 What Happens to the Ability to Sell Your Home With These Rises in Interest Rates?

Using a base of 5 %, If interest rates rise 1 percent and all other economic factors remain the same, purchasing power for homebuyers will decrease by just over 10 percent; therefore, every quarter-percent (0.25 percent) rise of interest rates reduces homebuyer purchasing power by 2.5 percent.

As a relative measure this  means for a home purchase of $100,000 1 percent interest rate rise of 1 percent reduces the buying power to just under $90,000 correspondingly a $300,000 home  a 1 percent interest rate rise reduces buying power to just under $270,000, similarly a $500,000 home purchase the buying power is reduced to just under $450,000. So, someone who potentially may have been able to purchase your home may no longer have the buying power to do so. This creates a smaller buyer pool and less demand for your home. It’s also likely to decrease its supply of buyers as fewer people are able to purchase homes.

If mortgage rates rise, it becomes more probable for indecisive buyers to rush into the market, and for the short term will likely see a decent boost; however, it could add extra pressure on sellers if rates continue to rise without leveling out.

While interest rates play a role in the housing market, there are a variety of personal and economic factors to consider, as well.

What Other Economic Factors Play a Role?
Supply and demand play crucial roles in determining the movement of home prices. If supply goes up, home prices go down. If supply goes down, home prices will probably go up. If demand increases, home prices most likely will as well. However, if fewer people are looking to buy homes, then prices will most likely decrease. As a seller, these are important factors to consider when putting your home on the market.

The sale of new homes is another factor to consider alongside rising interest rates because supply and demand will always play a factor in the home-buying process. Supply increases when new homes are created. Assuming that interest rates don’t rise too rapidly, paying attention to new-home inventory levels will give you an indication of what to expect as a seller.

Monthly income, as it relates to monthly mortgage payments, is a more important variable to gauge than interest rates alone. Your debt-to-income ratio plays a larger factor in your ability to qualify for a mortgage than interest rates alone. When monthly income rises, your ability to absorb higher interest rates does, as well. This means that as long as people are making more money, they’ll also be able to pay off any increase in debts.

When the real estate market crashed in 2007-2008, monthly payments of principal and interest were nearing 25 percent of the U.S. median family monthly income. Even with a rise in interest rates, Americans are currently seeing the highest monthly median income in the last 35 years. Because of this, the percentage of monthly income going toward monthly payments is still well below levels that analysts consider dangerous.

Overall, I've observed, we seem much more hesitant to take out mortgages than we have been in the past.

One of the largest surprises is the percentage of all-cash transactions for home purchases. Even with interest rates at historic lows, the percentage of all-cash transactions is higher than normal because we’re more cautious about taking on debt than we have been in recent decades.

High stock market valuations,  increase consumer confidence, allowing people to diversify their percentage of assets, cash out and reinvest in real estate to keep their portfolio balanced.

The number of distressed properties is a result of a strong job environment. This allows folks to pay their mortgages without defaulting, while also helping to keep prices up even with a rise in interest rates.

While interest rates play a large factor in selling your home for top dollar, they’re in no way the only deciding factor. All of the factors mentioned above should be taken into consideration before you consider selling your home because of rising  interest rates.

This information is being brought to you by Bill Fear, holding the prestigious (RAM) Real Estate Alumni designation at the University of Michigan.