Just as the San Diego real estate market was entering into a mini-housing boom, the Fed increased interest rates. Rising interest rates affect the housing market because it softens the pool of potential buyers. Since the rules of supply and demand dictate the prices that houses can be sold for it goes without saying that decreasing the amount of potential buyers will have an adverse affect on demand. While the inventory of homes listed on Sandicor, the San Diego County Multiple Listing Service, are still very low, the recent increase in interest rates has reduced demand. You might ask how rising interest rates affect the amount of buyers. The answer is best explained by math. Let’s say that a buyer is looking to purchase a home by putting 20% down and securing a conventional loan in the amount of $417,000. If the buyer was seeking a 30 year fixed rate, a month or so ago that buyer could have received around a 3.625% with all of his closing costs paid for by the lender. The principal and interest payment for a $417,000 loan amount, 30 year fixed loan at 3.625% is $1,901.73. To get a similar deal today the homeowner would get a 4.875% interest rate which would put the principal and interest payment at $2,206.80 resulting in a $300 per month increase to the payment. Beyond the obvious payment increase the other issue is qualification. If this buyer was already at the maximum acceptable debt-to-income ratio a $300 increase to the payment will tip them over the edge and they will not qualify for that loan amount. In other words, the buyer lost purchasing power because of the increase in interest rate which means that the increased cost of borrowing money will negatively affect housing prices. Of course none of this matters if the buyer is paying all cash or is not on the edge of qualifying for the loan. However, I am sure you can see how rising interest rates might soften the pool of buyers.
While the pool of buyers is still strong it has definitely been softened somewhat by the rise of interest rates. As of today it is still a Seller’s market but the winds of real estate change frequently so if you are considering selling your house you might want to move sooner rather than later or it might cost you.