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How Rising Interest Rates Affect Home Buyers And Sellers

Kevin Graham11-minute read

June 15, 2022

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The Federal Reserve – also known as the Fed – has been raising its benchmark interest rate to get inflation under control. If you’re a participant in the housing market at this point, you might wonder how rising Fed interest rates affect home buyers. What about sellers? Before we get there, let’s set some context.

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Why The Federal Reserve Raises Interest Rates

Two of the Federal Reserve’s major missions are to try to ensure moderate long-term interest rates and stable prices. If you’ve read the news lately, inflation is a hot button topic. There are several reasons for the rapid pace of price increases the economy is experiencing right now, but the only thing the Fed can control is the federal funds rate.

When the Fed raises the federal funds rate, it’s doing so in an attempt to curb inflation. However, because the federal funds rate is the rate at which banks borrow from each other overnight, it really impacts all interest rates across the board because every other rate a lender sets fluctuates with it.

When rates go up, they can do so more than once and often do. The federal funds rate has increased twice in 2022, rising 0.75% so far. Based on the projections and comments of the Fed governors, it’s anticipated that they could raise the federal funds rate several more times this year, in increments of 0.5% or more in the short term, with small 0.25% increases later on.

The Fed must balance a desire to control inflation with the negative impacts it can have on the economy. The idea of raising interest rates is to make it more expensive for people to borrow money, which slows down spending. If demand drops, the theory goes, sellers will lower or keep a lid on prices until demand comes back.

However, the other thing low interest rates help with is business expansion. If it’s cheaper for businesses to borrow, they’ll expand and employ more people. If you raise rates too fast, you risk spending cooling more than you might want. If there is less demand for products and services, businesses tend to lay people off. This directly hurts the Fed’s other Congressional mandate of providing an environment conducive to maximum employment.

If people aren’t spending and losing their jobs, this can lead directly to a recession. Although the economy tends to go in cycles, this is something every Fed chairperson wants to avoid. For this reason, while there’s theoretically no limit to how many times the Fed can raise rates, it’s a delicate balancing act.

The way the federal funds rate impacts mortgages depends on the type of mortgage you have. If you’re in a fixed-rate mortgage already and not looking to refinance or buy a new home, your mortgage rate won’t change.

If you’re buying a home or currently refinancing with a fixed-rate mortgage, there is no direct relationship between mortgage rates and the federal funds rate. That’s because rates are set based on the yields for mortgage-backed securities (MBS) and your personal financial picture. The Fed has been very involved in the MBS market at various times since the late 2000s, but the mechanism is different from the federal funds rate.

If you have an adjustable-rate mortgage (ARM), your interest rate has a much greater likelihood of being impacted by increases in the federal funds rate. The initial teaser rate in effect for the first several years of the ARM is set based on prices in the MBS market.

However, the adjustments may be tied to a bank’s prime rate or another index that tends to move in the same direction as interest rates in the broader market. In this case, if the federal funds rate is going up, it’s a good bet that your rate is going up at the next adjustment, depending on caps in your mortgage contract.

How Rising Fed Interest Rates Affect Buyers

Although mortgage rates and the federal funds rate aren’t directly correlated, they do tend to follow the same general direction. Therefore, a higher federal funds rate means higher mortgage rates for buyers. This has several effects:

  • You wind up qualifying for a lower loan amount. The amount of a preapproval is based on both your down payment and the monthly payment you can afford based on your debt-to-income ratio (DTI). Because your monthly payment is higher, you’ll have a lower loan amount you can handle.
  • You may have difficulty finding homes in your price range. As rates rise, sellers typically end up not raising prices and may even lower them if they don’t receive offers after a period of time, but it’s important to realize that this may not happen right away. Right now, there’s not enough inventory on the market to keep up with supply, particularly when it comes to existing homes. For this reason, pent-up demand could sustain higher prices for quite a while. Some buyers may be temporarily priced out of the market.
  • Higher rates mean higher mortgage payments. This would mean spending a bigger chunk of your monthly budget on your house.
  • You should carefully weigh buying vs. renting. Typically, with property values going up as fast as they are, the cost of rent goes up faster than mortgage payments, even with higher rates. However, every market is different, so it doesn’t hurt to do the math for your area.

How Rising Fed Interest Rates Affect Sellers

If you’re looking to sell your home, you may feel now is the time given that home prices have risen 20.2% this year, according to the Case-Shiller 20-city index at the time of this writing. As rates go up, there are several things you need to consider:

  • There may be fewer interested buyers. Higher rates mean more people could be priced out of the current market. Because of this, it could take longer for offers to roll in on your home and you may have to wait a while for it to sell.
  • You might have a harder time finding a new home. One of the things that makes your home so desirable and drives prices up as a seller is the fact that there are so few options on the market. What you need to realize is that even if you make a bundle on your home, you could end up spending a lot more to find another house. You would also be doing so at a higher interest rate.
  • Your home may not sell for as much. This is the part that’s hardest to predict because inventory is so limited that prices will remain high in many areas for longer than they normally would in a rising rate environment. However, at some point, the frenzy for housing will end. When that happens, you might have to lower your price to get offers.

Is Now The Time To Buy And Sell, Or Should You Wait?

Rising interest rates make things a little more challenging for buyers and sellers in the housing market, but it’s far from impossible. In the upcoming sections, we’ll discuss ways to tell if it makes sense for you to make a move, regardless of current market conditions.

Prospective Home Buyers

Rising mortgage interest rates are never ideal, but that doesn’t have to keep you from going from a prospective home buyer to the newest American homeowner. It all depends on your financial situation and whether you’re comfortable taking on slightly higher monthly mortgage payments.

Life plays a role in this too. If you just had a child and need more space or you have to move for a job, you might be pushed into buying regardless of whether it’s the ideal market.

The good news about higher rates for those who can afford the payments is that certain buyers you may have been competing with when rates were lower won’t be around as rates rise. Given this, you may have an easier time getting your offer accepted.

Homeowners Thinking Of Selling

If you’re looking at selling right now, you should be aware that eventually, the impact of having fewer buyers is that it’s harder to get top dollar for your home. This doesn’t mean that you should wait to list your home. There’s still a heavy imbalance of supply and demand out there. Given this, the sooner you list, the better your chance of cashing in on the buying frenzy.

We’ll get into this more later on, but a big key can be to work with an experienced listing agent who can help you determine the ideal price point. This is particularly important when there may be fewer bidding wars as rates rise.

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How Buyers Can Prepare

As mentioned above, you shouldn’t despair just because rates are on the rise if you’re a home buyer. There are several things you can do to make sure you’re prepared to meet any challenge the housing market can throw at you.

Get Your Finances In Order

The better your financial situation prior to applying for a mortgage, the easier it will be to qualify for a lower interest rate and a larger loan. With that in mind, take the following steps to improve your financial fitness:

  • Pay down existing debt. DTI is the key metric that lenders look at when determining what you can afford for a monthly payment. It’s a direct function of your income compared to the amount you spend every month making required debt payments. Neither is easy, but it can be easier to pay off debts than miraculously start making more money. If you’re trying to make the most impact on your DTI, pay off the debts with the biggest monthly payments first. If you are further out from buying a home, you may opt to pay off the debts with the highest interest rates first.
  • Improve your credit score. One of two key factors that determines your interest rate, your credit score is a big indicator for lenders of how you’ve been able to manage debt in the past. The higher your score, the better. Major influences on your credit score are your ability to make on-time payments and keep a relatively low credit utilization on revolving lines of credit.
  • Build your savings for a down payment. The other huge factor in your interest rate is your down payment. Simply put, the less a lender has to give you, the better your interest rate will be because there’s less risk involved.
  • Look for ways to trim your budget. We’re not suggesting that you subsist on off-brand mac and cheese and single-ply toilet paper, but finding small ways to cut back can make it easier to pay down existing debts or save for a down payment. Every little bit counts, so it doesn’t need to be a huge change. Over time, it was easy to feel the slow creep of signing up for six streaming services at $10 apiece. Now maybe you only actually watch two of them.

Find A Real Estate Agent

Working with a veteran real estate agent can be the best way to navigate a challenging real estate market. Good agents can help buyers find properties within their budget. They can also be key negotiators on your behalf in terms of getting a fair price and avoiding overpaying for a house.

Do 

Our friends at Rocket HomesSM can help you find a Verified Partner Agent in your area who can align on your goals and be an advocate on your behalf.1

Get Preapproved

Getting preapproved before home shopping not only lets you know exactly how much you can afford, but it also shows sellers you’re serious. You have the financing to back up your offer.

We encourage all of our clients to get a Verified Approval.2 This is a qualification traditionally referred to as a preapproval with a credit check, to go along with documentation of your income and assets. You and the sellers can have confidence in your offer.

Those with a Verified Approval can use RateShield® and lock their rate for up to 90 days while they shop for a home.3 Not only can this protect you from higher rates, but if rates fall during that period, you’ll have a one-time option to lower your rate.

Know Your Must-Haves

Because prices and rates are high, it could be important to know the difference between must-haves and things that are nice to have. Get as much of your wish list as you can while still maintaining your budget.

What Sellers Can Do

There are a few things sellers can do to make it easier to market their home even in an environment hindered by higher rates. Let’s run through them.

Make Sure That Selling Is The Best Choice

First, you should determine whether it’s the right time to sell. Given rates and high home values, some people may find that even if they make money selling their home, it may make more financial sense to stay put when they factor in the effort and expense of buying a new home right now.

That said, there are situations where you have to move. If you need to relocate for a job or find a new space that better fits your current needs, you should list your home now. Don’t settle for a suboptimal situation just because of the current real estate market trends.

Work With An Experienced Listing Agent

A good listing agent, also referred to as a seller’s agent, can help you decide on an appropriate price point given local market trends. They’ll also help you negotiate the finer points of your contract so that you can get the most out of your house.

Rocket Homes can help you find an agent in your area who can work to get you the best deal.

Stage Your House

Taking the time to stage your home is a good idea in any market, but it’s particularly important if there are fewer buyers coming through due to rising mortgage rates. It’s about showing your home in the best possible light.

You’ll want to do things like depersonalize the space and also declutter. You want to leave enough furniture that someone can imagine themselves in the space, but also have it be open enough to provide easy access if someone is walking through.

Your listing agent will be able to give you suggestions on how to best market your home before they take photos and schedule open houses.

The Bottom Line

The Fed is raising interest rates in an attempt to get prices under control. Still, that doesn’t mean that buyers can’t become homeowners and sellers can’t move on to their next place. It just becomes that much more important to be prepared by doing things like getting preapproved in advance and making sure you’re selling for the right reasons.

If you’re ready to buy, we can help you get qualified for financing. You can also feel free to give us a call at (833) 326-6018.

1 Rocket Homes℠ is a registered trademark licensed to Rocket Homes Real Estate LLC. The Rocket Homes℠ logo is a service mark licensed to Rocket Homes Real Estate LLC. Rocket Homes Real Estate LLC fully supports the principles of the Fair Housing Act.

For Rocket Homes Real Estate LLC license numbers, visit RocketHomes.com/license-numbers.

California DRE #01804478

2 Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, assets and debt. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, including, but not limited to satisfactory insurance, appraisal and title report/search, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close due to a Rocket Mortgage error, you will receive the $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. This offer is not valid for self-employed clients. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.

3 RateShield Approval is a Verified Approval with an interest rate lock for up to 90 days. If rates increase, your rate will stay the same for 90 days. If rates decrease, you will be able to lower your rate one time within 90 days. Please contact your Home Loan Expert for additional information. This offer is only valid on certain 30-year purchase loans. Additional conditions and exclusions may apply.

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Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.