On May 4, 2022, the Federal Reserve raised interest rates by half a percentage point. This might not sound like a lot, but it’s actually the biggest rate increase in 22 years.
The purpose of this rate hike is to fight inflation. By making it more expensive to borrow money, the Fed de-centivizes large purchases, which will slow the movement of money through our economy and slow down the price increases we’ve all seen over the past few years.
With the Fed’s interest rate directly tied to mortgage interest rates, this move has a major impact on home buyers and sellers. Let’s take a look at what the increasing interest rates mean for you.
What Increasing Interest Rates Mean for Buyers
If you’re looking to buy a home, this interest rate hike directly impacts you today by making your home loan more expensive. In our article, How Much Do Interest Rates Matter When Buying a Home, we saw that an interest rate of just half a percent can add hundreds of dollars to your monthly mortgage payment.
But there is some good news. If home loans are more expensive, fewer people will buy homes. And this means lower competition for you. Those of you who have lost homes in bidding wars in this seller’s market will be especially relieved to see fewer buyers in the market.
This raises two important questions: Will home prices drop with fewer buyers? And should you buy now or wait.
Will Home Prices Drop Because of Rising Interest Rates?
Probably not. Even if some buyers opt out of the market, buyer demand still far exceeds seller supply. This is why real estate analysts are forecasting increasing home prices in the Bay Area despite increasing interest rates.
Should I Buy Now or Wait?
Without a crystal ball, we can’t tell you what you should do. But here’s what we know:
The Fed has plans to raise interest rates further. So buying a home a few months from now will likely come with a higher interest rate than buying today. This is the projected path for the foreseeable future until inflation is fully under control.
There is no indication that prices will drop. And even if they dip temporarily, any money you might save could easily be offset by the higher interest rates.
Perfectly timing the market is nearly impossible. If you want to buy a home, there’s no reason to wait.
What Increasing Interest Rates Mean for Sellers
Unless you’re selling your house to immediately buy another, today’s increasing interest rates might not directly impact you as a seller. But they will impact you indirectly by changing the market landscape.
With interest rates thinning the buying crowd, there will be fewer buyers competing for your listing. This means you’ll need to work a little harder to make sure your listing stands out if you want to maximize your profit. It also means you’ll have less negotiating power as the market slows, so if you wait to list, you might need to consent to concessions or repairs that you wouldn’t need to agree to today.
Should I Sell Now or Wait?
Some sellers want to wait for the market to “peak” before selling. The problem with that strategy is that you can only see the peaks in hindsight. As we advise buyers: if you’re ready to make a move, make a move, even if market conditions aren’t “perfect.”
By selling today, you have the advantage of relative certainty. You can’t know for sure what will happen next month or next year, but you know that you can get a great price and a quick sale in today’s market.
The Bottom Line
Increasing interest rates will slow the rate of growth the housing market has seen over the last few years. And that’s not a bad thing; the current growth rate was never sustainable, and we need to reign in the excessive inflation.
But the interest rates can complicate things for buyers and sellers. Luckily, the real estate experts at Sequoia Real Estate have the market knowledge and experience to navigate these changing market conditions. Whether you’re in the market to buy or you’re looking to sell, contact us today for a friendly, no-obligation consultation.