Did you know that U.S. employers added 295,000 jobs last month? This report comes directly from the government, and the news had a pretty substantial impact on the real estate market. If you didn’t know, interest rates are determined by national and worldwide factors. Interest Rates are also the heart of the real estate business since the changing of the rate can determine if you can buy or can’t buy.
With the news of the increase of jobs last month and the decline in unemployment, it looks like the economy is taking a turn for the better; which is great news. However, the disadvantage of this situation is now that the economy is stronger; the Federal Reserve will likely hike up rates for the first time in a decade. This increase may happen as soon as June.
No one can predict when the Feds will do a rate hike, but it’s inevitable and with the current news it seems more and more likely it will happen this summer than this coming fall. Most buyers don’t realize how important interest rates are in the buying process. Most just know the lower the rate, the better, but they don’t understand the implications of a rate hike.
If the Feds increase the rate from 4.25% to 5.25%, hypothetically speaking, the monthly payment for a buyer goes up nearly $200. A half point increase in the rate changes a buyer’s payment by almost $100. If my buyer can afford up to $350,000, their payment looks like $1,794 a month at 4.25% on a 30 year fix and 20% down. If the interest rate goes up to 5.25%, their monthly payment goes to $1963, and now they are priced out of the market.
What most buyers don’t realize is that the interest rate is the life blood of what they can afford. It’s highly unlikely that a buyer can counter-balance the increase in monthly payment by an interest rate hike by putting more money down. Remember that every $10,000 is only about $50 towards your monthly payment. My buyers would need to put down an additional $40,000 to balance out an interest rate increase.
What’s the moral of the story? If interest rates go up, many buyers are going to go from price A to price B, and they are going to be very disappointed with what the latter can buy you. This doesn’t even begin to cover the desperation that will occur with buyers that get priced out of the market and add to the buying frenzy with lack of inventory and summer selling season. Don’t get priced out of the market. Buy now while you still can.
