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Home Equity, Purchase, Homebuying 101, Home Ownership

Should You Sell Your Home if Interest Rates Are Rising?

What You'll Learn: How to Decide When Is the Best Time to Sell Your Home When Rates Are Rising

EXPECTED READ TIME: 8 MINUTES

This year's economic projections and the Federal Reserve's statements indicate that interest rates will likely rise three or four times, starting in March 2022 and running into 2023. While this does sound bad for some home buyers, it is not as bad as we think because rising rates indicate a robust economy, and if you are selling your home, you shouldn't worry.  

When there is a strong economy, homebuyers are likely to see increases in their salaries, more substantial bonuses, and overall stability in the job market, making them more inclined to look for and purchase new homes. Also, with a climb in interest rates, homebuyers may feel an urgency to accelerate their home buying process, getting that home they are looking for before the rates rise too high, eventually pricing them out of some houses.

Does this mean I should sell now or wait for the rates to fall again?

No matter if you are buying or selling a home, you will always want to consider several market factors, which include:

  • Where are current interest rates, and where are they heading?
  • What is my plan for housing and life?
  • What is the motivation behind this decision? Am I moving as a necessity or a desire?
  • Where do we currently fall on the real estate cycle?

One of the most life-altering financial decisions you may ever make is selling a home. You do not want to rush or make a hasty decision. If you feel like you are being hurried due to an impending change in interest rates and believe that you need to lock in a deal "before it is too late" – take a moment, relax, and get your bearings. Life-altering decisions should not be made in a rush. Once you feel confident you are ready – you can make a proper decision.

So what does a rise in interest rates mean to the sale of homes?

Fortunately for the seller, buyers tend to go into a feeding frenzy with a looming interest rate hike. Just the rumor of a potential increase will have buyers hearing from their financial consultants, real estate agents, friends, and family all singing in unison, "you need to buy now before those rates go up." This choir might be a bit out of tune because the relationship between interest rate increases and what is happening in the housing market is rather complex.

Rising rates will usually pressure many buyers to accelerate their home buying rather than waiting, ensuring they purchase a home that fits their requirements and at an interest rate they can manage.

When interest rates are moving up and have a future outlook of a continued increase, like the position we are currently in, buyers will first flock to the market, which will have a short-term rise but will eventually cool off. Continued rate increases will sooner or later bring the buyers' purchasing power down. For those that are not sure if they have a substantial enough down payment, you will see them begin to consider alternative funding and down payment methods such as utilizing their 401(k)s to purchase a home.

Purchasing Power Is Reduced When Interest Rates Climb

It is recommended that if you are fully prepared to sell your home, you will want to complete the sale before rates spike significantly.

Buyers may become prevalent during the initial period when rates begin to rise, wishing to secure their new home before the rates move higher than their budgets will allow. A brief period of high demand with anxious buyers combined with a decreased inventory due to nervous sellers often occurs.

The market will eventually see weakening demand with climbing interest rates because homeowners fear they will not get the top dollar for their homes.

The potential buyer pool for your home will eventually shrink with a rise in interest rates, and with fewer buyers, your home's value may also decrease. Generally, with an increase in rates, buyers will begin to save more to put toward a larger down payment to lower their monthly mortgage payments. This result is not always the case, and it depends on your particular market.

The second and less common scenario is that rising rates may positively impact when you go to sell your home. As previously mentioned, a strong economy leads to rising rates. When employment numbers are consistently strong and employees are seeing salary increases and good bonuses year after year, the pool of buyers may feel more confident about purchasing a larger home. They may have the money to put toward a larger down payment, allowing them to lower their ongoing mortgage payments.

When we add all of these variables together, we see why the housing market is difficult to predict. The current economy has seen low-end workers increase their pay, middle income has stayed about the same, and the wealthy have done very well. If we see the pay increases moving into the middle income, then the housing market may move to the less typical scenario.

Rates are rising – what can we expect?

If you feel the rising interest rate pressure, you can keep this in mind: Interest rates don't increase drastically all at once. The plan is for ¼ point increases for the next year, and rates are still historically low, and with a 1% increase over the next year would still be so.

federal funds effective rate

Data courtesy of FRED

Looking at the Fed's rates for the past 35 years, Americans have seen several volatile rate changes. Between 1987 and 1988, rates climbed from below 6% to almost 10% before plunging to below 3% by 1992. From there, rates rose to 6.5% by the time the dot com bubble burst in 2000, falling to 1% by 2004. We saw rates increase again until the cracks of the housing market crash appeared in 2007.

The Bottom Line

If you are selling a home, don't fear. Do the needed research and ensure you are prepared to sell before signing anything. Friends, family, and even paid advisors may be telling you to do something, but ultimately it is your decision, and you are the one that it impacts. Making a hasty decision is never warranted and could affect you down the line. So think through your investment decisions carefully. Have a reason for the decision you make. And you won't go wrong.

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