Rising Interest Rates and Reduced Purchasing Power

The Federal Reserve raised the federal funds rate at its meeting on 3/21/18, as widely expected. Furthermore, interest rates are projected to continue to rise through 2018, with some predicting mortgage rates to reach 5% by the end of the year.

While this is still historically low for mortgage rates, buyers need to take into account the relationship between interest rates and purchasing power. The relationship is negative, meaning that an increase in the interest rate decreases purchasing power, and by a much larger factor that one might think.

The image below shows this relationship for a purchase price of $470,000, which is slightly below the average price for single family homes in Denver. As you can see, every 1% increase in the interest rate, decreases purchasing power by 11.2%, meaning that the buyer that used to be able to afford to by a $470,000 home is now looking at a $417,000 home.

Therefore, I encourage buyers that are currently on the sidelines, but seriously considering to purchase a home, to get in touch with me and a lender now, and get the process rolling.

Sellers should take note of this as well, because even though the market is continuing to go up in price, the pool of buyers that can afford their home now might shrink in the next 6 months due to rising interest rates.

Interest rates and purchasing power photo

 

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