Rate Hikes Not As Impactful As You Might Think

In the past month, a lot of news was centered on interest rates and when (not if) they are going to go up. There was concern that the Fed would increase rates a little earlier than expected at their September meetings, but they held rates steady. The prevailing feeling amongst many economists is that rates will hold until December, the final FMOC meeting of the year and first after the election.

So, given the likelihood of a rate hike fairly soon, I crunched some numbers to see the real impact it will have on a typical home purchase. A mortgage on a $500k purchase with 20% down payment will increase $56.74 if rates go up 0.25% from 3.625% to 3.875%. On a $1M purchase under the same terms, the increase is $113.49.

Since anybody could do the simple math, I thought I’d share a different and deeper analysis that looks at rate hikes relative to home price appreciation.

From 2014 to 2015, home prices increased over 10% while interest rates remained constant. That means a home worth $500k in 2014 was worth $550k in 2015. Applying a constant interest rate of 4%, the mortgage payment went from $1,909.06 in 2014 to $2,100.63 in 2015. That’s an increase of $191 per month without a rate increase!

From that perspective, price inflation clearly has a bigger impact on mortgage payments than the rate hikes that are expected. The good news

is that price appreciation has slowed dramatically this year. Instead of double digit percentage appreciation, the market has been closer to 3%. Hence, that $500k property last year is $515k this year, as opposed to $550k in previous years. A mortgage on a $515k purchase at 4% is $133.68 less than a mortgage on a $550k purchase at 3.625%.

The impact of an impending interest rate hike looks like it will be neutralized by low price appreciation. My message to sellers is there’s reason to believe buyers will still be active and maintain demand on your home. To buyers, you’re not losing buying power. To me, the downside of interest rate hikes are pretty benign in today’s market.