How the Rate Increase Can Effect Both Home Buyers and Sellers

Housing typically makes up one-third of a household’s income, so it’s no surprise when the economy influences the real estate market. Both buyers and sellers are impacted by whether the economy rises or falls. The current inflation situation has become an unignorable truth in household budgets and every time you turn on the news. As a result, the federal funds rate has increased by 1.75% or greater in 2022. The rate is going up because the Fed is trying to tap the break on our economy which has, admittedly, gone a little wonky between the Covid disruptions, the war in Ukraine, the embargo of Russian oil, and a lashing of legendary natural disasters. So how will this federal rate increase affect home buyers and home sellers in the coming year?

Let’s break down the domino effect.

Home Buyers’ Impact From the Rate Increase

Home buyers will be the most immediately impacted because a higher fed rate means higher interest rates.

Rising Interest Uses Up Each Buyer’s Budget

Each buyer has a budget – a size of mortgage they can afford both in monthly payments and maximum price. The more of that budget the interest takes up, the less house each buyer can afford. Apply this to all home buyers across the board, because the federal interest rate is the key by which all other lenders set their rates so that when it rises, all mortgages get more expensive.

A Practical Downsizing of Home-Buying Plans

Buyers who can afford fewer houses will have a harder time finding homes that are big enough for their needs. Especially now that home offices are a must-have. But wait, there’s more.

Buyers Get Creative When Cornered

Buyers who are forced to downsize their plans get creative. They will seek starter homes, fixer-uppers, or an affordable builder. The tiny home and converted van trend may come back now that Covid has eased, and multi-family compromises may gain popularity.

What Home Sellers Should Expect From the Rate Increase

Sellers will not immediately notice a difference as the rate increases but will feel the change in buyer patterns.

Buyer Behavior Impacts each Seller’s Market

Buyers are more likely to completely reject homes whose values inflated wildly during the post-pandemic boom and are already seeking more affordable and modular new construction homes instead of homes in neighborhoods with pre-built value.

A Shift to Affordable Homes

Luxury features, spacious interiors, outdoor living, and home offices are still in demand, but buyers will be pushed to smaller and more affordable homes. Mortgages are getting significantly more expensive, so buyers will not be able to splash out and are also less likely to get into bidding wars over homes they are already compromising over.

Sellers who can make affordable homes delightful will likely thrive, and this may be a good time for investment homeowners with many small yet family-ready properties to sell to a now-eager market.

Adjustable Rate Mortgages

Homes sellers who still have an adjustable rate mortgage may find their payments suddenly more expensive. This is because an ARM is often subject to the lender’s prime rate, which changes with the federal rate.

Challenges Replacing the Home You Sell

Sellers also may struggle to swiftly replace a home if they are planning to upsize or downsize. Smaller homes are now in higher demand, while larger homes are more financially out of reach. Make long-term plans for a home exchange and use your Section 121 tax exclusion.

Home Buyer and Seller Strategies in a Shifting Economy

The economy is experiencing many influences, but whether it’s up or down, people still need to buy and sell houses. At Atlantic Home Mortgage, we’re here to help you do that.

Building a mortgage is building a life plan. It can shape your entire future. We want to help you find the right home at the right price for both your finances and the current state of the economy. Contact us today.