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Rising Interest Rates and Values

Do rates really affect your property values?

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Do the rising interest rates have an effect on the market value of your property? The short answer is yes.

Over the last decade, home buyers have experienced incredibly low interest rates, aimed at stimulating economic stabilization and encouraging the absorption of the massive amount of real estate inventory that resulted from the Great Recession.

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Interest rates have remained extremely low for the better part of a decade, but we've been seeing rates slowly rising. The Federal Reserve stated in late 2018 that there will be more rate increases in 2019. What will those rate increases look like? We don't know, but the vast majority of economists agree we'll continue to see rates rise at a modest rate throughout 2019. Matthew Gardner, chief economist for Windermere Real Estate, currently forecasts that 30-year fixed rates will end 2019 right around 5.3 percent.

Presently rates are holding steady in the 4.5 percent range. For every 1 percent increase in mortgage rates, purchasing power drops by 10 percent; thus, peoples' budgets drop by 10 percent. Let's say you're looking at purchasing a $500,000 home at an interest rate of 4.3 percent right now, but you decide to wait until next year to buy, when the rate is at 5.3 percent. You're now only qualified to purchase a home for $450,000. Keep in mind, this is a rudimentary example.

So, what does this mean for the market value of your home, specifically in Bend. According to the National Association of Home Builders, the Bend market is one of the least affordable in the country, outside of the California market. NAHB's data suggests that just 26.5 percent of households making a median income can afford to purchase a median-priced home in Bend. As such, any increase in rates could have a dampening effect on home price growth.

Does this mean we're going to experience massive price adjustments and the downfall of the market? The simple answer is no. What it does signify is a trend toward a more neutral market. In 1999 the 30-year fixed rate was at 7.8 percent. People didn't stop buying homes because the rate was that high. Properties continued to appreciate at a steady rate and it was a healthy market.

The rising interest rates will have an effect on the buyer pool. As explained in the example above, buyers who could afford $500,000 this year may likely only be able to purchase a $450,000 home, thus, shrinking the available buyer pool. When the buyer pool shrinks, the more competitive your pricing needs to be to attract a buyer, there again having that dampening effect on home price growth.

When working with your real estate professional, it's important to consider all factors when pricing your home. Rising interest rates are not just the buyers' component to consider, but a seller's too.


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