Here’s what you need to know about how interest rates affect real estate.
By now, you’ve probably heard a ton about interest rates, especially as they relate to the housing market. People talk about them like they’re life and death for our housing market, but why is that? Recently, I’ve received a lot of questions from clients about how interest rates actually affect our housing market, which is why today, I’m sharing three of the biggest impacts of interest rates in real estate:
1. Interest rates affect mortgage payments. When you hear about the Federal Reserve raising or lowering interest rates, they aren’t directly changing mortgage interest rates. However, the two numbers are closely related, and mortgage rates tend to follow federal interest rates pretty closely. This means that when interest rates go up, it becomes more expensive to borrow money for a mortgage. Due to these higher mortgage payments, it becomes more expensive for non-cash buyers to purchase homes. Similarly, homes become more affordable when interest rates decrease
2. Interest rates affect home prices. Since housing affordability is directly related to mortgage interest rates, demand tends to be greatly affected by rates. This means that if interest rates rise and demand falls as a result, housing prices will be likely to decrease—or at least stop increasing. On the other hand, lower interest rates are associated with rapidly increasing home prices. For example, this is what spurred on the great housing market frenzy during the COVID-19 pandemic.
3. Interest rates affect housing activity. Since rates affect home affordability, demand, and home prices, they also affect activity. Many homeowners don’t like to move when interest rates are high, especially if they have a lower rate locked in with their current mortgage. As a result, homes tend to spend more time on the market when interest rates are higher, and they fly off the MLS when rates are low.
While it may sound like it doesn’t make sense to move at all when rates are high, the truth is that there are a lot of creative solutions to higher-rate markets. Plus, there are a few unique benefits to moving when rates are higher. For example, competition tends to flood the market when rate decreases are announced. If you want to beat the rush and get started on your next move, please call or email me. I am always willing to help!