by Scott Voak

At the time of this writing, interest rates have been increasing significantly for four weeks. Rates are up over ½ a point and buyers are feeling the effects of diminished purchasing power. At today’s interest rates, an increase of one percent in mortgage rates lowers the purchasing power of a buyer by 10% (assuming they are putting down 20%). So, a buyer who could put $100k down and qualify for a loan of $400k can only qualify for a loan of $360k if rates go up a single point. In many cases, this is causing buyers to step back. Despite the fact that rates are still at historical lows, the recent rate increases have put buyers in a position where they need to lower their expectations; something that is not easy to do when purchasing a home for your family.

On the other side of the transaction, I don’t think sellers in the San Diego area are going to get hurt by the rising rates – at least not yet. There is too much pent up demand. The rising interest rates are slowing some buyers down, but for the most part that just means fewer offers and not necessarily reduced prices. However, if rates continue to climb we can expect the market to eventually slow down. Rising rates do provide a headwind to the market, but the market is just too strong right now for them to cause a noticeable slow down.

One thing to keep in mind as you try and decide how long the market will keep rising is that there are thousands of homeowners with subsidized under-market rates who won’t be selling anytime soon as their mortgage payment is now much lower than they could rent a similarly priced home. This means that those homes are essentially “off the market” and will not be offered for sale. This restricts, and will continue to restrict, the number of homes available for sale and keep supporting prices.