The Importance of Purchasing Power

Home prices and buyer purchasing power are closely linked: when buyer purchasing power is strong, home prices are strong. Conversely, when buyer purchasing power is waning, home prices generally fall.

Our current very low interest rate environment has provided home buyers with more purchasing power and delivered more potential buyers to home sellers. The Federal Reserve’s policy of keeping interest rates artificially low over a long period of time – done in the name of economic recovery after the Great Recession of 2008 – has been rumored to go away for almost one year now.

Interest rates are now going up. The March 2017 increase was the second interest rate increase in 3 months. Rates remain low but look out for additional increases over the rest of the year.

Other factors of home price movement besides interest rates include the percentage of down payment home buyers can afford. In other words, it is advantageous to buyers to have personal savings that amount to at least 20% of the home’s purchase price. There are a variety of other factors which influence home prices and affordability.

Once interest rates go up, seller financing options will be more sought after because those allow the home buyer to purchase the home at the interest rate the seller currently holds and to assume the seller’s loan. But banks do not like seller financing and are likely to enforce due-on-sales clauses.

This in turn means that home buyers will have to take out their own, higher interest rate loans. The effect on sellers is generally downward pressure on their home’s price.

Given the effects of interest rates on home buying, both homebuyers and home sellers stand to gain from making their home selling or home buying move before interest rates go up.

©SFRE 2017

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