By Joseph Callaway
How do interest rates affect home prices? First, let’s discuss buyer pools. This concept says that at any given price point on any given day there are a certain number of qualified buyers out there looking for property. Also, it is easily understood that the buyer pool gets smaller as the price point increases. In other words, just making up numbers for the example, if there are 500 buyers out there qualified to buy at $500,000, then there are probably 200 buyers at $1 million and maybe only 20 buyers at $2 million.
Now, we are talking qualified buyers, meaning buyers who have met with a lender and determined how much house they can buy. Part of that determination is the current interest rate. For instance, again using made up numbers for illustration, if the rate is 2.5%, then the buyer may be qualified for a $400,000 loan. But, if that rate goes to 3.5%, then this buyer is now only qualified to buy a $300,000 home.
Now, imagine what happens if rates jump. Suddenly, all the buyers out there now qualify for less house and, like dominoes, the buyer pools tumble down to the next price point, and with the next interest rates increase, to the next price point after that. What this means to the seller of a $600,000 home is that the number of buyers who might buy this home is now reduced to half of what it was before the rate increase. Plus, these remaining buyers are now disillusioned. They suddenly must settle for less than they expected the day before. Some will settle and others may abandon the pursuit altogether.
So, how do interest rates affect home prices? If rates go up, then demand goes down, potentially taking prices with it. Now, all this takes place in a subtle, fuzzy way. People say the market has softened or we are shifting to a buyer’s market. Prices become more negotiable, and we all absorb the change because, after all, only a small percentage of us are selling at any given time. The only time this becomes important to you is when you decide to make a change and, at that time, it is what it is. Only Realtors live through the ebbs and flows of the market, and it is that expertise that makes it valuable to consult a Realtor for expert advice when buying or selling your own home.
Joseph Callaway is the owner of Those Callaways Realty, based out of 85254, where he and his wife JoAnn are proud to call home. For additional information, visit ThoseCallaways.com or call 480-596-5751.