I recently had a potential client ask me about the impact of rising interest rates on future home sales in Arlington.

He’s thinking of selling his home in the near future, and was concerned that a rise in interest rates would make it harder for him to find a buyer.

So, I did a little digging into the practical effect of rising interest rates on the Arlington real estate market—Specifically, in the $1 Million to $1.5 Million price range. Here’s what I found:

In a recent Northern Virginia Realtor (NVAR) article, they discussed the impact of rising interest rates. Interest rates have already risen this year, and are projected to continue rising into 2019.  The writer’s opinion is that rising interest rates will create buyer urgency to buy and lock in a rate, before rates move higher. Historically, this has been proven to effect home sales.

But what practical effect will this have on home sales in Arlington? Let’s take a look at some factors.

1) Current Market Strength

We define the strength of markets based on inventory divided by sales within the last 30-day period:

  • A Seller’s market has less than 3 months inventory;
  • A normal market has 4-6 months inventory;
  • A buyers market has over 6 months inventory.

Looking at Arlington home sales—our market continues to favor sellers for homes priced between $1m and $1.4m. The last 30 days look like this:

Price Range Homes Sold Active Listings Months of Inventory
$1 Million – 1.1 Million 5 5 1
$1.1 Million – 1.2 Million 15 7 0.5
$1.2 Million – 1.3 Million 10 14 1.4
$1.3 Million – 1.4 Million 10 18 1.8

2. How Rising Interest Rates Affect Home Affordability

I like to play with numbers. If the question is affordability, let’s see how rising interest rates will affect a buyer’s monthly mortgage payment:

  • $1,250,000 Sales price
  • $ 250,000 20% down payment
  • $1,000,000 Mortgage

For a 30 year fixed mortgage, the monthly payment will be:

  • 4.5% = $5,066
  • 5.0% = $5,368 (+$3,600 per year / +$108,000 over 30 years)
  • 5.5% = $5,677 (+$7,200 per year /  +$216,000 over 30 years)
    (Note, taxes, insurance and other fees not included above)

George Mason Mortgage and other local lenders are rolling out Adjustable Rate Mortgages (ARM).

A $1m mortgage with one of these programs looks like this:

  • Libor ARM (fully amortized) = $4,774 per month
  • Libor ARM (interest only) = $3,333 per month

Utilizing an ARM mortgage could potentially offset the practical effect of rising interest rates on a buyer’s monthly payment.

3. The Practical Impact of Rising Interest Rates On Home Sales in Arlington

While Interest rates influence real estate, the other elements —jobs, the economy, inventory and location are equally important. Will interest rates, alone, slow the Arlington market? Most likely not, as long as the other elements remain strong and there’s a limited inventory, which has been the case for years now, and shows no signs of changing anytime soon.

Here’s why: There are simply too few homes for sale, and too many qualified buyers who want to buy homes in Arlington. Buyers are willing to pay a premium, and an increased mortgage payment of $3,600-$7,200 a year is not going to be a significant hurdle to those buying $1 Million + home.

As long as our local economy remains strong, and the Arlington Real Estate market continues the slow, steady growth it has enjoying the past few years, the demand for homes in Arlington will remain high. Arlington will continue to be a seller’s market, and interest rates will not curtail home sales in a significant way.

Agree or disagree? Have any thoughts or questions about the real estate market?

Let me know!

Lou Sagatov, Realtor®


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