By Chad Taylor
Buyers and sellers alike should be watching this story very closely. No other factor has as much effect on home affordability as interest rates. Higher interest rates can not only affect the price of the home that a buyer can afford, it can also have a direct effect on inventory levels.
A couple of weeks ago I wrote about signs of a shift in our market where inventory levels are rising. An increase in interest rates coupled with already inflated prices can price some buyers right out of the market, which can exacerbate this rising inventory trend. Usually this trend begins with first-time home buyers. If they are unable to afford a starter home at the current prices (coupled with rising interest rates), then the seller of a starter home may have to price more competitively to achieve a contract. If the seller is unwilling to price more competitively, the seller may be stuck owning his own home for a few more years. Unfortunately, this stops the domino effect where the seller of the starter home then purchases a move-up home. And then that seller then purchases their next home. And so on…..
I want to be really clear about what I mean by “rates.” The Fed cannot simply raise the interest rate that a consumer will pay when borrowing money to purchase a home, a car, etc. They can and do, however, raise the Federal Funds rate. The federal funds rate, according to Investopedia is “the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis.” Therefore, when banks borrow funds from one another on a short term basis to meet reserve requirements, they charge each other an interest rate. This is the federal funds rate.
As banks incur additional costs of doing business, like when the federal funds rate is increased, do you think that they just absorb the additional expense or pass it along to the consumer? Ding, ding, ding! We have a winner! They pass it along to the consumer, typically in the form of a higher interest rate for the consumer’s loan.
As of just a few days ago, the markets had the probability of a rate hike in June only in the single digits. This quickly changed after the release of the minutes from the Fed’s April meeting coupled with the fact that the economy seems to have bounced back from a weak first quarter. William Dudley, the New York Fed President and Vice-Chair of the Federal Open Market Committee was quite vocal on Thursday after the stock market dropped 180 points responding to further talk of a rate hike. “I was surprised that the market wasn’t taking more signals from what Fed speakers were actually saying,” Dudley told reporters Thursday. “The market was not putting in a sufficient probability” of a June rate hike.
“I am actually quite pleased that that probability has in fact moved up,” Dudley said, referring to the jump in probability of a June/July rate hike to 60 percent.
I have said before that in most cases, buyers and sellers do not know that the market has shifted out of their favor until it is too late. Interest rates are one exception. The Fed is not mincing words when they speak of another increase to the funds rate. Therefore, buyers and seller out there, take the cue and act. In most cases, buyers understand that rates have a direct impact on affordability. When money costs more to borrow, your mortgage payment goes up and what you can afford can be compromised. But sellers tend not to flinch as much at higher rates. This is a mistake. Not only can higher rates affect the absorption rate (the number of homes that are selling each month), causing inventory to rise. It can also affect your future home. With inflated home prices already working against you, when interest rates go up, a move-up purchase may not accomplish as much for your family as it can today. To clarify, the space and updates that you can afford today because of low interest rates may not be an option as rates go up. Are you willing to take less and still pay more?
Call us today to discuss our proven strategy to get your home sold quickly while maximizing your equity. The sooner you sell, the sooner you can take advantage of today’s low interest rates before they are a thing of the past.
A good time for a good cause
This weekly sponsored column is written by Chad Taylor of the Taylor-Made Team and Keller Williams Realty Key Partners, LLC. The Taylor-Made Team consistently performs in the top 3 percent of Realtors in the Heartland MLS. Please submit follow-up questions in the comments section or via email. You can find out more about the Taylor-Made Team on its website. And always feel free to call at 913-825-7540.