Rising interest rates unnerve homebuyers

USA Today (Society for the Advancement of Education), July, 2004

For many American families, their home is not only their castle, it has become the equivalent of their stock portfolio, retirement account, and ATM machine. Families who do not own homes want a piece of that action, and many who already own want a bigger one. Yet, rising interest rates could stifle those dreams. What is the best way to protect yourself?

To answer that question, financial planners first caution that any housing decisions always should be made not just on the basis of interest rates, but in the context of particular needs and circumstances. For instance, a fear of rising interest rates may push renters into buying soon, before "it's too late." Yet, they need to consider several factors first. Can they really afford a home, or at least the home they want? Will coming up with the down payment (such as by raiding their retirement funds) or the monthly house payments jeopardize other financial necessities? Will they have to pay exorbitant interest rates because of bad credit, when their priority should be fixing up their credit, not buying a home? Do they anticipate living in the new home for just a short time? Such a stay could prove expensive because of the buying and selling costs. Moreover, you may be forced to sell into a high-interest-rate market that has stalled or depressed housing prices.

Should I sell my current home and buy another before rates rise further? Homeowners who have been thinking about selling and moving are getting antsy, fearful that if they wait any longer they will not be able to sell their current home and afford the home they really want. Like first-time homebuyers, they need to be careful not to jeopardize other financial needs. A second risk is that they may pay too much for a home in an overheated marketplace as panicked buyers outbid each other in a rush to purchase before rates climb further.

Some may be tempted to sell and rent until prices and interest rates stabilize. Again, if you plan to live long term in what you buy, why wait, suggest some advisors. Do not Let today's sound bites about interest rates drive your long-term housing decisions.

Should I avoid buying now because of the risk of a housing bubble? Housing experts disagree about how much damage rising interest rates will inflict on prices. Also, the bursting of housing bubbles typically occurs locally or regionally, not nationwide, so any impact would depend on where you buy and sell. Actually, trying to guess what housing prices will do in the coming months and years is like trying to guess how stocks will perform.