How Changing Interest Rates Might (or Might Not) Affect Your Home Buying Process

Jan 21, 2017

Some background: In the midst of the economic downturn of 2008 and 2009, the Federal Reserve lowered the federal interest rates in an effort to stimulate spending. 

What’s that mean in non-banking lingo? People were worried about job and economic stability, so they were prioritizing saving their money. As a result, many weren’t taking on new debt, like buying a home. So, in order to encourage spending and a growing economy, the Federal Reserve made it cheaper to borrow money.

Since the economy has recovered by many metrics, there’s been recent talk of raising interest rates yet again. What could that mean for you as a home shopper? 

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Rising Interest Rates, Not Always ≠ Lower Home Prices 

It seems logical that rising interest rates would lend way to higher mortgage payments, which would lead to less people shopping for homes. And the decreased demand for homes would lower the price of those homes that are on the market.

According to some experts in the industry, this isn’t always the case. As detailed in a recent BankRate.com post, “Rates tend to rise because, in a relative sense, the economy is doing well, incomes are going up, people can afford more and they’re willing to take out a larger mortgage. Intuitively, you’d think that if interest rates go up, of course, house prices go down. But they don’t,” says Mark Palim, vice president for applied economic and housing research for Fannie May.

CalculatedRisk.com blogger Bill McBride agrees. “The bottom line is that other factors (like a stronger economy) have a bigger impact on house prices than changes in mortgages rates.”

Buyers Impacted by Life Event 

While most bankers (like this blogger!) may be tempted to suspect that potential homebuyers will shop (or not shop) based on interest rates, this may not actually be the case for many shoppers. Recent research from leading real estate and rental company Zillow suggests otherwise. As reported in a December CNBC article, researches at Zillow surveyed consumer housing trends and found that buying a home is less tied to current mortgage rates and more closely linked to a consumer’s financial well-being. Life events, such as job changes, promotions or changes in the number of people in the household are precipitating factors for a purchase. 

“While those looking to buy a home are understandably concerned about the path of rates ahead, it’s important to remember that borrowing costs remain exceptionally low by historical standards,” said Erin Lantz, vice president of mortgages at Zillow.

Ergo another reason as to why an increase in interest rates may not sway buyers – Millennials. Defined as those between ages 18 and 34, Millennials have overtaken Baby Boomers as America’s largest generation. And most are at the age of marriage, babies and “settling down.”

Unfortunately for this group, Zillow’s Trulia site reports that the number of homes available to the first-time buyer fell more than 12 percent in 2016 as compared with 2015. This means that starter homes make up less than one-quarter of nationwide listings; so prices on homes suited for first-time buyers probably won’t be dropping anytime soon, regardless of where interest rates may land. 

If you’re in the market for a home and want to find out more about how today’s interest rates could impact your future mortgage payment, talk to your neighborhood Washington Federal loan officer today.