Fall is upon us and winter is fast approaching. But, will it be winter or spring time for the wallets of those considering buying or selling a home in 2017? There is a lot of debate about the possible economic outcomes of a Trump Presidency. Time is the only indicator we can trust to tell whether Trump’s proposed policies will be good or bad for the overall economy, the real estate markets, and, consequently, our wallets. So, what about these rising interest rates?
What We Know
Here is what we know for sure. National news publications are reporting that The Federal Reserve Bank plan to raise interest rates in December 2016. These reports are based, in part, on the following quote from the Federal Open Market Committee from earlier in the year:
“The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” Source: NY Times
Now December has come, and we are definitely seeing a rise in interest rates. We also know that if job growth occurs and wages increase, then the effects of rising interest rates on consumers could balance out, at least, or be, somewhat, of a moot point, at best. This is why time is the most reliable indicator of the verifiable effects of any monetary policy. For, it’s hard to predict, accurately, before the uncertainty in the job market is removed. However, let’s look, generally, at how rising interest rates could potentially affect property values under the current employment climate—as this is the only verifiable information we have for analysis.
How Do Interest Rates Effect Property Values
All players in the real estate market should be aware or reminded that mortgage rates are not the only variable that affect property value when interest rates rise. Rising interest rates also affect the cost of capital rates—hence the final list or closing price. The cost of capital is what home builders and investors pay to invest in new construction or existing income producing properties. Investopedia put it this way,
“…Many people incorrectly assume that the only deciding factor in real estate valuation is the mortgage rate. However, mortgage rates are only one interest-related factor influencing property values. Because interest rates also affect capital flows, the supply and demand for capital and investors’ required rates of return on investment, interest rates will drive property prices in a variety of ways.”
Also, this Investopedia video does a great job explaining these scenarios in layman terms as it is vitally important to understand all the factors that affect property values when interest rates increase—as these factors intersect and affect the final closing price. Also, a basic understanding of interest rates, and how they influence the main players in the real estate market, can help consumers make wise mortgage decisions, such as choosing between a fixed-rate or adjustable-rate mortgage (ARM) or whether to refinance out of an adjustable-rate mortgage.
What Rising Interest Rates Look Like on Main Street
So what would rising mortgage rates look like for home buyers and sellers (new or experienced) nationally, under current employment climate? And more importantly, what would it mean, on Main Street, for Eastern and Coastal North Carolina residents? Again, keep in mind that a true picture depends upon what happens with job market. For, rising interest rates could be a positive for the nation and all players in the real estate market. However, rates are surging. We saw interest rates rise 40 basis points right after the election from 3.57% to 3.94% shortly after the election. The chart below shows rates as of late last week at 4.13%. However, as rates rise and wages and job growth remain the same, then rising rates, under this current employment climate, could look like the following for buyers and sellers:
Seller “Rate Lock.” Have you ever had the mad itch to upgrade to a bigger or better home (or neighborhood) but hesitated because you loved your current mortgage rate more than you disliked living in your house? In other words, you can’t afford to move to a bigger or better house because of the rising rate. Nationally, rising interest rates (assuming current stagnant unemployment rates remain the same) could mean “rate-lock” in a many markets. Rate lock, effectively, means people will stay locked into their current rate and not sell because they can’t afford to. And consequently, when sellers hold, it creates a shortage in inventory.
Buying Power Reduced. Buyers who have concern about rising interest rates have a relative narrow window of opportunity to act. They should take action to consult a Realtor, as soon as they are able, so as to qualify and lock in a rate they are comfortable with before a full point rate increases occur. As rising rates beget rising home prices which limits how much home buyers can afford.
The bright side is even though rates are rising, rates are still relatively low. There is still a window of time for buyers to buy and sellers to take action to buy or sell. And if you are located in Eastern & Coastal Carolina, where I am currently, here are the latest rates as of December 16, 2016. .