Economic projections indicate that the Federal Reserve could raise interest rates three times in 2019 and at least one time in 2020. But that might not be as bad as it sounds. If interest rates are rising, that typically indicates a robust economy.
A strong economy means that homebuyers are most likely seeing larger bonuses, increases in salary, and overall stability in the job market, making them more inclined to purchase a new home. However, with interest rates on the rise, buyers might also feel the urgency to buy a home before mortgage rates become too high.
Does that mean I should buy or sell now?
When buying or selling a home, you’ll always want to consider a number of factors including: Where are interest rates at and where are they heading? What’s my plan? What’s my motivation behind the decision? Where are we in the real estate cycle?
If you are feeling rushed due to changing interest rates and think you need to lock in a deal before it’s too late, please take a moment to catch your breath. Buying a home will be one of the most important purchases you may ever experience, and you do not want to rush into something too fast. Once you’re confident you’re ready, that’s when it’s time to pull the trigger.
So what do rising Interest rates mean for home sales?
Buyers tend to go into a frenzy at the thought of interest rates rising. Real estate agents, financial consultants, friends and family all seem to be saying the same thing: buy now. However, the relationship between interest rate increases and the housing market is quite complex.
Rising rates might put pressure on buyers to find a home sooner rather than later to ensure they get a home that fits their needs at a manageable interest rate.
When interest rates begin to creep up with a future outlook of a continued rise, buyers will flock to the market before eventually cooling off. As rates continue to rise a buyer’s purchasing power will go down. For those that aren’t sure if they have a large enough down payment, something to consider could be using your 401k to buy a home.
When interest rates rise, purchasing power goes down.
If you are fully prepared to sell your home, do so before rates spike significantly. Fewer folks will be able to afford your home as interest rates rise, therefore it may decrease the value of your home.
Buyers might also wait until they have more money saved toward a down payment so that their monthly mortgage payment will be less. However, depending on your market, rising rates could also have a positive impact on the sale of your home.
As aforementioned, rising rates indicate a strong economy. Employment is strong and steady and employees are seeing higher bonuses and salaries each year. As salaries and bonuses increase, buyers might feel more comfortable purchasing a larger home. They might have more money to put toward the down payment, leading to a lower monthly mortgage payment.
Add all of these variables together and the housing market becomes hard to predict. Demand typically weakens as interest rates rise because homeowners are fearful they won’t get top dollar for their house. But buyers can also become more prevalent during the initial period of rising interest rates because they want to secure a new home before rates become higher than they can afford, leading to high demand by anxious buyers and decreased inventory by nervous sellers.
Rising interest rates and what to expect.
If you’re feeling the pressure of rising interest rates, keep this mind: Interest rates aren’t going to increase by a drastic amount all at once. Realistically, the Fed won’t increase the Federal Funds rate by more than 4 percent in the next couple years. In fact, they probably won’t even come close to a 4 percent increase.
Looking at the last 30 years or so, Americans have endured much more volatile interest rate changes by the Fed, according to historical data charted by Advisor Perspectives' market and economic trends analysis team dshort. From 1987 to 1988, the Federal Reserve raised rates from 6 percent to nearly 10 percent. Between 1994 and 1996, the Federal Reserve increased rates from 3 percent to 6 percent. From 2004 to 2007, the Federal Reserve took rates from around 1 percent to 5.25 percent before home sales started dropping in 2007 at the start of the housing market crash.
In short, don’t fear. Take your time, conduct the necessary research and ensure that you are fully prepared to buy or sell a home before signing on the dotted line. Making hasty decisions could have very significant, detrimental impacts down the line, so it is important to always think through your investment decisions carefully, despite what the media and your friends and family are saying.
Be ready for things to go wrong.
No one loves shelling out money for unexpected expenses, but sometimes that seems like a rite of passage in homeownership. “Most of the time, the unhappy surprises are simply due to people being unaware of the things that can crop up,” says Brad Hunter, chief economist for HomeAdvisor. First-time homebuyers in particular may not know what to expect after closing on a home, and there’s nothing worse than developing buyer’s remorse about one of the largest investments you’ll ever make. Here are eight headaches to prepare for if you’re looking to purchase a house.A suddenly less-than-desirable location
A suddenly less-than-desirable location
Buying a house across the street from a high school didn’t seem like such a bad idea when you saw how nicely renovated it was. But when you don’t have kids and Friday night football games are keeping you up later than you would like, you realize you should have made a pros-and-cons list regarding the location. Don’t let a charming interior override a location you dislike or a lot that will give you flooding problems. “If you don’t like your lot, don’t buy the house, because you cannot change that,” says Kim Wirtz, a Realtor for Century 21 Affiliated in Lockport, Illinois.A high monthly mortgage payment
A high monthly mortgage payment
One of the most crippling headaches to deal with is a monthly mortgage payment you find you can’t quite afford. Lysette Portales, a real estate agent with Century 21 Jim White & Associates in Treasure Island, Florida, says she stresses to clients that they should shop around for a mortgage with multiple lenders and inquire with each about different program options. “A lot of them might be able to do 100 percent [financing],” she says, noting that many homebuyers typically only know about a couple mortgage programs and settle for one without considering what would be most affordable option both now and down the line.Items that are on their last legs
Items that are on their last legs
Whether it's the roof, water heater or furnace, aging home systems will need replacement. And that may end up being sooner than you’d like, especially if you didn’t pay close attention to the age and condition of the roof, plumbing, electric and heating and cooling systems when your inspector pointed them out. HomeAdvisor’s 2015 New Homeowner Survey found that 75 percent of homeowners face an unexpected emergency within a year of purchase. To expect the unexpected, Hunter points to the survey’s recommendation that homeowners plan to spend 1 percent of the home’s purchase price on unplanned repairs. Maintaining at least that much in your emergency fund will help keep you from dipping into other savings from year to year.Old systems
It’s important to pay attention to a home's aging big-ticket items before you even make an offer. “A lot of homebuyers are distracted by how cute a home can be,” Portales says, adding that she makes it her job to point out the age of the roof, air conditioning unit, water heater and more to buyers. Then when it comes time to calculate an offer, you should factor in the cost of those pieces that will need immediate replacement when determining how much you think the home is worth.An air conditioner that's not the same
An air conditioner that's not the same
Wirtz says one of the things in a home that seems to always break or have issues within the first year of its purchase is the air conditioner. But it’s not always because it breaks down – she says it simply might not be as effective as the new homeowner wants it to be. “It may not be cooling like they’re used to,” Wirtz says. You can either learn to deal with a little less cooling, bring in an HVAC pro to inspect and fix any problems or research any DIY fixes that might get it cooling better – like air conditioner cleaning spray.Unseen leaks
Home inspectors aren’t able to see through walls, so the discovery of a pipe leak isn’t uncommon after you’ve moved into the home. But this is one repair you want to make as quickly as possible. “When there’s water that is not stopped, it can create mold – and mold remediation is extremely expensive and extremely difficult,” Hunter says. Mold growth in your home can cause serious health problems, so it’s imperative to address any moisture issues as quickly as possible to avoid it becoming any more dangerous, let alone more expensive.Surprise renovation expenses
Surprise renovation expenses
Fixer-uppers are all the rage these days, as many homebuyers are willing to take on renovation projects in exchange for a slightly lower price tag. But when budgeting for your renovations, leave plenty of room for the discovery of existing problems once your contractor looks behind the walls. The HomeAdvisor survey found 51 percent of homeowners spent more time on home projects than they expected. “Even if you have a fully vetted, well-reviewed contractor … they still might uncover issues that maybe a previous contractor left incomplete,” Hunter says. He recommends leaving around 10 percent extra space in your budget for surprise problems of any kind.Problems that pile up
Problems that pile up
All too often it feels like the problems in a home have a snowballing effect, but you don’t have to go broke tackling them all at once. “Day one, [homeowners] won’t have to tackle all those projects,” Hunter says. “They can use the list of items found by the home inspector as a checklist and prioritize the items on that list and create a budget.” You should immediately address those problems that create a health or safety issue, such as a broken step or leak in your roof that could lead to mold. But replacing an older dishwasher can wait until next year, when you have more room in your home repair budget.Read More
Teresa Mears | May 3, 2019
Conventional wisdom says 20%, but you can buy your first home with much less down.