The Market Effect of Rising Interest Rates and Home Value Appreciation

By: Victor Normand
Published: April 2013

While Zillow is usually not an accurate measure of a properties worth with their “Zestimates®” model and should be verified with a local Agent, their research in the field seems very credible.

They recently surveyed over 100 economists on the subject of expected home price appreciation over the next five years and produced a consensus summarized in the chart below.

The report shows an expected price appreciation of about 4% annually for the market as a whole. There is much that can go awry, and every market is different, but increasing home prices seems a good bet for the next several years.

With this in mind, it might seem to make sense to wait before going forward with listing your home.

List Now or Wait for Better Pricing

Federal Reserve policy will keep mortgage interest rates low for a while, at least until the unemployment rate goes below 6.5% or inflation rises above 2%. Currently at around 3.5%, expect interest rates to rise heading toward their historic average of around 6%. When that begins to happen, consumer buying power will effectively decrease. How much? It is actually quite dramatic. The Buyer with 20% down who is qualified to buy a home in Acton with an average price of $620,000 can only afford to buy a home priced at $539,000 if interest rates rise to 5%.

The chart below shows what happens between now and 2016 under the following conditions:

  • Home prices increase at 4% annually
  • Savings for down payments increase at 4% annually
  • Income available to pay a mortgage increases at 4% annually
  • The mortgage interest rate increases one percentage point from 3.5% to 4.5%

The point here is that the qualified buyer for your home today, even if their income and savings for the deposit rise by 4% annually, will have $60,000 less buying power, given only a 1% rise in mortgage interest rates. The upshot is that the pool of prospective buyers shifts to lower priced homes, effectively putting downward presser on prices.

So here are the variables:

  • Will homes appreciate in price as much as predicted?
  • Will household incomes rise?
  • Will inflation remain low?
  • How quickly will mortgage interest rates increase?
  • How will all of the able interact

What does all this mean? Essentially, it means that if your personal life circumstance would be best served now by downsizing, trading up or down, or cashing out, waiting for the best time to do that because of perceived market conditions may not be the best advice.

So, if you are happy with your current home and you know it – Love It; if you really should make a change, then List It. Get on with life and if a move is indicated, talk to a Resident Expertsm straight away.