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Interest Rates Rise, Real Estate Prices Dropping and Carrying Costs Soar

By Josh Resnek

Two weeks ago, the Federal Reserve Board raised interest rates by another 3⁄4 of a point in order to stem the inflation which is causing so much mischief with our economy.

How does this affect the Everett economy?

First and foremost, the local home real estate marketplace is dramatically changed by the interest raises.

If you are selling your two or three family home, the days of the wild west are gone.

Let’s say, for instance, your home is worth $800,000 and you want to sell it.

Since the interest rates have risen, selling your home has been made much harder. Not impossible, mind you. Just much more difficult.

For a buyer to purchase a two or three family for $850,000, he or she must have 20% down for a conventional loan. This means $170,000 has to be put down. A mortgage of $680,000 must be acquired.

Just six months ago, when mortgage rates were at 3% or less, that meant that the $680,000 loan would cost in the vicinity of $20,000 a year before taxes and principal.

Factor in the new rates, and that same $680,000 loan now costs closer to 7% interest or approximately $47,600 a year before taxes and principal.

Potential buyers are now dealing with the higher interest rates.

This causes several things to happen.

There are fewer potential buyers able to pay the much higher carrying costs.

Fewer potential buyers cause brokers to suggest to sellers that they reduce the price for their properties to take the rough edge off the higher cost of the mortgage.

There are other problems.

Fewer homeowners are putting their homes up for sale right now because they know they have to drop the price a bit. In other words, the optimum time to sell your property has passed in this rising interest rate era now upon us.

However, with fewer homes up for sale, prices are not dropping dramatically because demand remains so high among the smaller number able to make transactions.

Interest rates can dumb down sales but they can’t stop speculation.

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