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Interest Rates vs. Home Prices?

This week our listings saw 1.8 showings each on average, though that average is skewed.   Our aggressively priced listings are showing  two to  three times  or more  per week, while the others may not be seeing any traffic at all.   In the news this week, the Federal Reserve met and decided to leave their key interest rate unchanged.   After that meeting, there has been significant talk about an increase in the coming weeks to counter inflation and the weak dollar.   The stock markets and specifically the Dow Jones Industrial average, S&P 500 Index, and NASDAQ Index all took a beating this week.

The discussion over interest rates continues to drive home a point that I’ve been making for months now.   In our local Charlotte market, there are plenty of home buyers out there but the majority of them are  concerned about making a purchase right now for fear of future home price declines.   As the media continues to focus on home prices, that fear is understandable.

However, the media has failed to report on the affect that changing interest rates will have on the market.   Home buyers would be wise to consider how interest rate changes  will impact a purchase in the coming years.   While economists predict that Charlotte home prices are likely  to remain flat and perhaps decline up to 2% or so, it is almost a given that interest rates will increase significantly in the next 12 months.   The rate for a conventional 30 year fixed mortgage, which is currently just over 6%, could easily rise to 8% by the end of next year.

Do the math and you’ll find that an increase in interest rates can have a far greater impact on housing affordability than an increase in housing prices.   So what’s the worse of two evils for home buyers:   An increase in mortgage interest rates or the chance of home prices declining by a few percent?   For example, the payment for a $200,000 mortgage at 6%  would be  roughly the same as a $180,000 mortgage at 7%.   In other words, a 1 point increase in interest rates has about the same impact on monthly mortgage payment  as a 10%  increase in housing prices.

While a 1 point increase in rates over the next year is likely, a 10% drop in home prices in Charlotte is not part of anyone’s predictions.   Buyers have a limited opportunity to lock in a low interest rate for 30 years on a great deal in a buyer’s market.   As rates increase, the opportunity for a great price AND great financing dwindles.   A wise real estate  buyer knows that the combination of both are what make a great investment.

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