The Federal Reserve recently raised the prime interest rate, but that’s not the end of it. We can expect a total of four rate hikes in the next 12 to 18 months. So, what does this mean for your clients?
If you are currently working with clients who are on the fence about buying or listing a property, the rate increase could be a great motivator. Here are five facts about interest rate increases that may inspire clients to jump into the market.
1. Waiting a few months to buy may result in waiting a few years to own
In the short term, a small rate hike affects many buyers on the bubble from qualifying for a mortgage. Some of these buyers have such a tight debt-to-income (DTI) ratio for mortgage qualification that $50 can set their DTI ratio into a non-qualifying status.
That means a quarter percent increase can result in losing financing on a purchase. The client will then need to rely on salary increases or reduction of debt before they qualify for a home purchase.
2. Concentrate on resale homes or quick move-in construction
Many millennials and first time homebuyers are attracted to the new construction. Who wouldn’t want to pick their home style, colors and finishes for close to the same price as a resale? And because many of the national builders require little money down and can offer FHA, VA and USDA for new builds, they become even more attractive.
But because a buyer cannot lock into an interest rate until 60 days before the home is ready to close, ground up construction may not be a good option for buyers on the bubble. If we have another rate increase before construction reaches the 60-day-to-close period, your client may no longer qualify for the home.
3. Sellers who wait to list might wait to sell
We are currently in a seller’s market. The inventory is extremely low, appreciation is high, and there are more active buyers resulting in multiple-offer situations. But with every rate increase, the balance begins to correct. It is considered a balanced market when there is about three to six months of inventory on the market.
A balanced market, or a tip to a buyer’s market, will increase the amount of time a home is on the market. With each month a home is on market, further expenses are incurred by the owner.
4. Buying down an interest rate might be a good idea
If a rate increase knocks a client out of qualification on their DTI, or if a payment is outside of a buyer’s comfort zone, buying points may be a good option.
When interest rates were at 4 percent or below, it wasn’t always worth it. But with interest rates now close to 5 percent (and predicted to reach 6 percent by the end of 2019), buying points are making more sense. Plus, you can use creative financing, such as asking the seller to pay the point to minimize the out-of-pocket punch of the buydown.
5. House appreciation will slow as the market corrects itself
Most areas have recovered or exceeded pre-recession values. Sellers who are waiting and relying on appreciation calculators may lose.
Current appreciation is between 4 percent and 6 percent per year. However, some analysts are predicting future appreciation could be as little as 2 percent.
If that’s true, sellers may be in a lose-lose situation. For every quarter percent the interest rate goes up, they lose potential buyers, and when combined with declined appreciation, they may yield less return on the sale.
It’s important to remind our clients (and ourselves) that we’ve seen uncommonly low interest rates in the past few years, and with a market correction, we will be back to the (then pre-recession low) interest rates of 6 percent. It wasn’t that long ago that 6 percent was an unheard of low rate.