Interest Rates Impact

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Interest Rates will have an impact on the housing market. Someone who could afford a $300,000 house at 2.5% in 2021 can only afford a $265,845 home in 2022 with a 3.375% rate according to a key mortgage lender we use, Ryan Brown Cross Country Mortgage.

A Buyer thus has lost $34,155 of purchasing power. Below you’ll find some scenarios that Ryan shared with us showing the purchasing power from 2.5% to 3.375 and then scenarios of 4.5%, which is where the market might be headed according to several reporting on the Fed.

At the moment, this means Buyers need to be constantly monitoring rates, updating pre-approvals, and locking in. It also means that if you are considering purchasing, you must be aware of this as there is a cost of waiting a year. To make matters more complicated, if we have inflation of 8%, than purchasing power gets even worse for a Buyer.

This is the first chink I’ve seen since the early days of the pandemic that will be some impact on the market.

While many of the Buyers are cash here, it’s not that way across the country. Meaning if a Buyer can’t afford someone’s $500,000 home in Buffalo and that Seller wants to move here, they will now be on the sidelines. We are all interconnected.

However, interest rates compared to inflation have a wide gap – so a $3.375 or 4.5% rate with 8% inflation isn’t too bad. There are also so many other factors. We have little prime land left to build on, and that alone should fuel purchasing. There has been a 34% increase of New Yorkers moving to Palm Beach County, according to driver’s license statistics that just came out in the past year. Interest rate hike impact alone is not a game changer, but it is a factor.

Scenarios Showing Full Impact of Rate Change Scenarios

2021 Rates went from 2.5% to 3.375%

2022 3.5 to 4.5…?

Power of Interest Rates

(Illustrating the difference in approved loan amounts for a 1% increase, from 3.5% to 4.5%)

If $300,000 then $265,845= Decreased purchasing power by $34,155
If $500,000 then $443,075= Decreased purchasing power by $56,925
If $750,000 then $664,515= Decreased purchasing power by $85,484
If $1,000,000 then $886,151= Decreased purchasing power by $113,848

Power of Interest Rates and Appreciation

(Illustrating the difference in loan amounts for a 1% increase to rates, from 3.5% to 4.5% and adding in 8% appreciation to illustrate if you wait to purchase one year. Based on 80% LTV)

375,000 purchase price, 80% loan = $300,000

If $300,000 then $265,845= Decreased purchasing power by $34,155

$375K purchase price x 108% = $405,000 ($30,000)

Total loss waiting 1-year = ($64,155)

If $500,000 then $443,075= Decreased purchasing power by $56,925

$625K purchase price x 108% = $675,000 ($50,000)

Total loss waiting 1-year = ($106,925)

If $750,000 then $664,515= Decreased purchasing power by $85,484

$906,250 purchase price x 108% = $978,750 ($72,500)

Total loss waiting 1-year = ($157,984)

If $1,000,000 then $886,151= Decreased purchasing power by $113,848

If $1,250,000 purchase price x 108% = $1,350,000 ($100,000)

Total loss waiting 1-year = ($213,848)

Posted in Open House Blog, Real Estate Tips on January 29, 2022 at 8:27 am.

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Days on MarketDOM

35Days | 59%

Active InventoryAI

5,159 Homes | 50%

Median Sales PriceMSP

$644,500 | 7%

New ListingsNL

1,611 Homes | 13%

Closed SalesCS

1,174 Homes | 1%

Dollar VolumeDV

$1.3B | 30%

Months of InventoryMOI

4.5 Months | 55%

Pending SalesCS

1,124 Homes | -10%

Interest Rates Impact

Interest Rates Impact