When interest rates fluctuate, especially when the Fed raises them, home sales are affected rapidly and significantly. Home buyers are impacted directly and almost immediately, but sellers feel the effect too. And interest rates are indeed fluctuating. About two years ago, rates hit near historic lows, but that is now changing. We have seen several rate hikes causing interest rates to rise the fastest they have since the 1980s. These rising rates mean buyers are facing steeper monthly mortgage payments, and sellers have to deal with decreasing demand and the possibility of lowering prices. So let’s dig in and see what fluctuating interest rates mean for Santa Cruz home buyers and sellers.
How Interest Rates Affect Home Buyers
First, let’s take a look at fluctuating interest rates from a buyer’s perspective. Since rates are no longer low, we’ll examine how rising rates affect home buyers in Santa Cruz.
Rising rates powerfully affect buyers’ competitive bargaining power. Higher monthly mortgage payments owing to the higher interest rates prevent buyers from making offers on homes they could have previously bid on. The result is that buyers are forced to seek homes in a lower price range because they qualify for a lower mortgage loan amount.
The pre-approval process for a buyer heavily weighs the size of the down payment and the buyer’s debt-to-income ratio (DTI). A higher interest rate makes a buyer’s monthly mortgage payment higher and less favorable DTI, so that a buyer qualifies for a lower loan amount and, as a consequence, has to purchase a cheaper house. And the unfortunate fact is that these houses have been and still remain in short supply.
The consensus among industry experts is that things aren’t going to improve for buyers at the lower end of the market. Inventory in the current market is still low, so sellers aren’t lowering prices as they would in a more balanced market.
Fluctuating interest rates can directly impact the affordability of homes. When interest rates are low, it becomes more affordable to borrow money for a mortgage, and buyers may be able to afford more expensive homes. Conversely, when interest rates rise, the cost of borrowing increases, potentially reducing the affordability of homes.
Lower interest rates can increase buyers’ purchasing power by reducing their monthly mortgage payments. This can allow buyers to qualify for larger loans or choose more expensive properties. Higher interest rates have the opposite effect, reducing purchasing power.
Fluctuating interest rates can influence the demand for homes. Low interest rates can attract more buyers to the market, increasing competition and potentially driving up prices. Conversely, high interest rates can reduce demand, resulting in fewer buyers and potentially lower prices.
Fluctuating interest rates also impact existing homeowners who may consider refinancing their mortgages. Lower rates may encourage homeowners to refinance, reducing their monthly payments or allowing them to tap into their home’s equity. Higher rates can discourage refinancing and limit homeowners’ options.
How Interest Rates Affect Sellers
From a seller’s perspective, fluctuating, especially rising, interest rates actually have a fairly dramatic impact. This is compounded by the fact that many sellers are operating under some misconceptions.
Interest rates can affect the number of potential buyers in the market. Low rates tend to stimulate buyer demand, leading to more competition among buyers and potentially increasing selling prices. Conversely, high rates may reduce buyer demand, leading to fewer potential buyers and potentially lower selling prices.
Home prices have been rising for some time, and some sellers think this will continue to be the case. They think they will continue to get multiple offers even at or above their asking price. Many sellers are also still accepting offers only from preapproved buyers.
Fluctuating interest rates can impact the time it takes for homes to sell. In a low-rate environment, sellers may experience shorter listing periods as increased affordability attracts more buyers. In a high-rate environment, homes may stay on the market for longer as buyer demand decreases.
With interest rates rising, though, sellers need to make sure a buyer’s preapproval is based on current interest rates. Sellers should also be prepared for the fact that fewer buyers will now have a preapproval letter in hand. They will also receive fewer offers, and it will take them longer to sell. The high times for sellers are coming to an end.
Interest rate fluctuations can influence the negotiation dynamics between buyers and sellers. In a low-rate environment, sellers may have more leverage as buyers compete for limited inventory. In a high-rate environment, buyers may have more bargaining power as sellers may be more motivated to close deals quickly.
Many sellers today are looking to sell their current home and upgrade to a bigger, better home. They will find this more difficult now with rising rates and a lower sale price. The upshot is that they will find it more difficult to buy their next home.
Under these market conditions, most sellers can benefit immensely from working closely with an experienced Santa Cruz agent. To consult a top agent and discover more, just call 831-588-2334.
Property Values and Interest Rates
Rising interest rates can also benefit home buyers and sellers in Santa Cruz. Most of the time, property values are directly related to mortgage rates. But for this to play out properly, the larger economic conditions have to be right.
If, for example, the economy grows at a rapid rate, rising mortgage interest rates will not have the expected impact on housing prices and property values. But as long as the economy grows, along with job and wage growth, rising interest rates should not affect the housing market too adversely, and property values may increase.
Should You Buy/Sell?
So should you buy and/or sell with interest rates on their current trajectory?
Experts say that you shouldn’t let rising mortgage rates put you off buying or selling and buying at the same time. Although rates are indeed rising, they are still lower than they were in the not-too-distant past. It’s just that they seem high after the recent historic lows. Consider that in 1986 the average mortgage rate was 10.19% – much higher than it is today.
But with the current economic uncertainty and wildly fluctuating rate, buyers and sellers find that the services of a good agent are almost a necessity.
The Need for a Good Santa Cruz Agent
Still, fluctuating interest rates, especially when they’re rising, are nothing to be taken lightly. Rates affect the housing market more than they do other business sectors. Some buyers will be forced into lower-end housing, and some sellers will have to drop their asking price and expect a sale to take longer.
It’s important to note that the real estate market is influenced by various factors, and interest rates are just one of them. Other factors, such as local economic conditions, supply and demand dynamics, and government policies, can also impact the Santa Cruz housing market for both buyers and sellers.
That’s why the services of an experienced Santa Cruz agent are so critical at this juncture. So if you’re a Santa Cruz home buyer or seller and are concerned about the impact of fluctuating interest rates, contact us today at 831-588-2334.
