What Rising Interest Rates Mean For Sellers

by Jennifer McMurrayJanuary 11, 2019

2018 saw four interest rate increases by the Federal Reserve Bank (FED), and more are predicted for 2019. If you own a home, you may be thinking that has little to no bearing on you. Unfortunately, with each rate hike, it has the potential to greatly hurt not just buyers—but sellers as well. From reduced buying power, a shrinkage in the buyer pool, less affordability, to increased days on the market, it’d be wise for sellers to take note of the impacts each rate hike has on their current home selling situation.

Housing market concept image with graph and toy house.

Post-recession, the power greatly shifted to the seller. With intense demand and very little inventory, buyers’ desperation led to better bottom lines for sellers. Over the last two years, it wasn’t unusual in most markets to see homes sell in hours and over list price after a flurry of bidding wars. And while the market is still considered a seller’s market, the market is fluctuating—in part due to interest rate increases.

Reduced Buying Power

Before a seller can truly understand how the rate increases specifically impact them, they need to understand how it impacts buyers. With each rate hike, a buyer sees reduced buying power. Using the bank’s typical approval methodology and the buyer’s same salary, with each rate hike, the overall pre-approval limit for the buyer is reduced in order to align with the buyer’s monthly ability and debt-to-income. In fact, with a 1% rate increase, a buyer’s purchasing power decreases by 11%.

What does this mean for a seller? It means that buyers that were pre-approved to buy your home six months ago, may no longer be able to purchase your home. Their approval limit has decreased, and they have been priced out of your home.

Housing market concept image with graph and toy house.

Shrinking Buyer Pool

As the buying power is reduced for potential home buyers, the pool of qualified buyers shrinks. While the last couple of years may have seen bidding wars and numerous showings, that may not be the case as these rate hikes continue.

As previously stated, every rate hike hinders buyer’s ability, and the ability hurdle will mean sellers will see less attention from qualified buyers.

Less Affordability In The Market

Due in part to the intense seller’s market over the last two years, home prices have soared. And for many, they have soared beyond an affordable range. Buyer’s are “paying up” to get into a home, plus factor in an increased interest rate, and they may be sitting on a monthly mortgage amount that isn’t comfortable.

Home prices have continued to rise, and incomes aren’t keeping up. With overall increased interest, buyers can’t realistically afford as much as they previously could. Again, this impacts sellers because they’re not only less qualified buyers, they can’t afford to pay top dollar with an increased interest rate.

Frustrated homeowners looking at bills.

Steps Sellers Can Take To Cater To Buyers

Buying a home takes a lot of initial upfront cash, something the average home buyer may not have thanks to student loan debt. Many potential first time home buyers have opted to continue to rent because they’ve struggled with getting approved for a loan due to debt or they have struggled to acquire the cash necessary for a down payment or closing costs. As affordability decreases and rates increase, buyers may feel left out in the cold.

If you’re planning to sell in 2019, knowing the factors that impact buyers will make you a better seller. While 2019 is still projected to be a seller’s market, it’ll most likely lose its momentum. However, there’re still several steps sellers can do to cater to buyers and increase their odds of a quick sale and nice profit.

  • Consider having your home pre-inspected to identify areas of concern. Fix those items prior to having your home listed. Buyers may struggle to mentally overcome the repairs and move on to a better option.
  • List sooner rather than later. Listing at the very beginning of 2019 — before the next rate hike — will give sellers better odds of more qualified buyers.
  • Speak with a local, trusted lender who can advise you of changing interest rates and how that might affect buyers in your area.
  • Consider offering an appealing allowance to buyers — possibly assist with closing costs, offer a home warranty, or negotiate a lower price.
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About The Author
Jennifer McMurray
Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She's passionate about the power of real estate. She's also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

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