If you’re thinking about buying or selling a home, you may be interested in learning more about how the economy affects your decision. Many of us have noticed the news that interest rates continue to rise, and the Federal Reserve has indicated that this trajectory is going to persist until inflation is tamed. Here’s a look at how every rate increase takes a bite out of your buying power, and why it’s not recommended to try and time the market:
Every Increase Decreases Your Buying Power
The unfortunate reality is that every half-point percentage point rate increase has a significant impact on your buying power. Many buyers are surprised to discover that a modest 1% rate increase can decrease your purchasing power by an astounding 11%. Even more disappointing is that the larger your desired loan, the shorter your money will go as interest rates rise. However, there are several strategies you can employ to make buying more attainable even if and when rates go up.
Why You Shouldn’t Wait If the Time Is Right
The Fed has been forthcoming about the need to continue to hike interest rates. This means that you shouldn’t expect mortgage rates to decrease any time soon, and that even higher rates may be on the horizon. With these insights in mind, some buyers are making the choice to press pause on shopping for a home with the hope that rates will decrease in the future.
Although rates may start to come back down in years to come, it’s important to be clear-eyed about the possibility that home prices will also continue to rise. If you’re prepared to purchase a home and the only thing holding you back is the current interest rates, it may be worthwhile to consider the appreciation you’ll be missing out on by waiting. This is especially true in Boulder County, where most homeowners have an incredible amount of equity and our market has proven to be among the most stable in the country. Of course, you’ll want to be sure that your monthly payments are affordable. There are options out there to help homeownership attainable, such as the 2-1 buydown program and other specialized loan programs that allow for less than 20% down. Adjustable rate mortgages (ARMs) are also an option to consider, since this type of loan offers a lower-than-average introductory rate, usually for the first five to ten years.
Other Factors to Consider
In addition to missing out on appreciation by waiting to buy until interest rates decline, it’s important to put the historical trends into perspective. It’s true that mortgage rates have been in the 5% range or below since the early 2000s, so anything above this level feels high. However, rates of past decades reached well above 7% and were especially high in the 1980s. This isn’t to diminish the disappointment that buyers feel as they learn of each new rate hike, because it’s certainly frustrating. Given how quickly the rate increases keep coming and how aggressively the Fed is hiking rates, it makes sense that buyers are feeling a sense of trepidation–but it’s also wise to temper the knee-jerk reaction with more optimistic data.
If you’re ready to buy or sell your home amid the Fed’s aggressive action to curb inflation, it’s understandable for you to think it over before making your decision. However, there is a definite cost of waiting if you’re ready to list your current home and move on to your next property. If you want to maximize your buying power, move forward with your plans whenever you’re ready–and don’t wait for what the economy has in store. If you have any questions about listing your home in Boulder, I’m here for you. Please contact me to arrange a consultation.