How Current Interest Rate Trends are Impacting Buyers and Sellers
Just when you think you’re finally past the headaches caused by the pandemic and have begun easing into a sense of normalcy, inflation spikes and housing growth slows.
While changes in the housing market are to be expected, it’s never fun having to react to these shifts. One of the biggest challenges impacting the housing market today is the rising mortgage interest rate environment.
On the one hand, rising mortgage interest rates were expected, if not inevitable. Many experts considered these rate hikes healthy within a broader scope. On the other hand, if you’re selling your home or intending to purchase one, interest rate hikes can feel like a gut punch.
For years mortgage interest rates had been at or near historical lows. From the aftermath of the financial crisis through 2021, low interest rates have helped fuel homeownership for thousands of borrowers.
Today, rising interest rates present a new challenge for both buyers and sellers alike. Now it’s even more important for people to consider the impact rising mortgage interest rates have on the market as a whole.
Knowing how this trend will shift the market and being able to pivot strategically to these changes can make all the difference between successfully buying or selling a home.
Understanding the Impact Interest Rates Have on Real Estate and Mortgage Markets
One of the key reasons why interest rates are going up is because the Federal Reserve is trying to balance the economy by trying to reduce inflation to a reasonable level. Inflation refers to the increasing cost of consumer goods and services over time.
As interest rates go up, the cost to borrow money also goes up, respectively. This disincentivizes people to spend more money, which in turn lowers the demand for goods, services, and even new homes, as affordability shrinks.
As demand falls, so does inflation. In fact, supply and demand shifts are common when interest rates trend upward or downward. For example, the most recent inventory data from July 2022 highlights an uptick in active listings, meaning more inventory hitting the market.1
Recently, inflation hit a 40-year high. Since the start of 2022, the Federal Reserve has taken to aggressive quantitative tightening by issuing several interest rate hikes while also reducing its balance sheet.
While raising interest rates can have a dampening effect on inflation, there are several other positive and negative effects it can have on both buyers and sellers.
How Sellers Will Feel the Effects
One of the side effects of the rising mortgage interest rate environment is that home prices can often take a hit. In Southern California, median sales prices actually fell 1.3% in July compared to the month of May.2
Decreases in property values because of interest rate hikes have been linked to affordability. As borrower affordability shrinks, demand for new homes falls. This often requires sellers to either reduce their asking price or pull back and take their home off the market altogether.
In a broader context, diminishing property values can also delay existing homeowners from upgrading to a larger home or moving to a nicer area, because you won’t be netting as much from the sale of your current home. It can also make your property search much more difficult.
Additionally, buyers are also becoming empowered and more selective of the homes they choose to buy. Home contingencies and seller concessions are becoming more prevalent again.
This trend just exacerbates underlying issues in the market. However, the silver lining is that while active listings are trending upward, new home construction remains slow.
A new study has found that the U.S. is short over five million homes, with production being less than pre-pandemic levels.3 It could take years for home builders to catch up which means new buyers will have to turn to existing inventory if they want to make the transition from renting to owning.
How Buyers Will Feel the Effects
New interest rate hikes are leaving many buyers feeling trepidatious. Buyers are experiencing a bit of whiplash from what was heightened, unprecedented market conditions during the pandemic, to new higher borrowing costs today.
While competition has settled (to an extent), with bidding wars being much less prevalent, it has become much more difficult for buyers to afford a new home. That’s because purchasing power has dropped significantly. The same loan you could get a year ago has a much higher monthly payment today.
Another obstacle in the path of new home buyers is institutional investors. Large companies with deep pockets are beginning to scoop up available inventory to rent to prospective tenants as the rental market heats up.
However, as the market does settle, those that can still afford a home will have many more options in terms of listed properties and eager lenders to compete for the best repayment terms.
Key Takeaways
Dynamic mortgage and real estate markets can be healthy, but that doesn’t make mortgage interest rate increases any less scary. In fact, interest rate hikes are one of the biggest headwinds impacting both buyers and sellers today.
The Federal Reserve seems to be staying the course by increasing rates in the wake of higher inflation, which is resulting in lower affordability and purchasing power for buyers. Sellers are also facing headwinds as demand has started to fall while home values have slightly weakened.
In fact, most sellers will have to pivot and become buyers themselves. Consider situations like retirement or divorce. To successfully navigate current market conditions, it may be strategic to consider downsizing, upsizing, or even utilizing a 1031 exchange to your advantage.
If you are concerned about the higher interest rate environment as a whole or are simply unsure about which strategy is the best course of action, having the right real estate team in your corner will be crucial to creating a plan for this dynamic market.
Leslie Hemedes and her Compass real estate team have over 35 years of experience helping buyers and sellers just like you navigate the waters to ensure your next real estate transaction moves as smoothly as possible.
Kick your interest rate worries to the curb by setting up your free, personalized consultation to discuss your specific scenario and develop a real estate solution that is sure to succeed no matter what rates are doing.
Sources
1 Hale, D., & Speianu, S. (2022, August 23). Housing Supply. Realtor.Com Economic Research. Retrieved August 29, 2022, from https://www.realtor.com/research/topics/housing-supply/#:%7E:text=The%20national%20inventory%20of%20active,first%20time%20since%20September%202019.
2 Khouri, A. (2022, August 18). Southern California home prices fell in July. Los Angeles Times. Retrieved August 29, 2022, from https://www.latimes.com/business/story/2022-08-17/home-prices-might-be-startin 3 Olick, D. (2021, September 15). America is short more than 5 million homes, and builders can’t make up the difference. CNBC. Retrieved August 29, 2022, from https://www.cnbc.com/2021/09/14/america-is-short-more-than-5-million-homes-study-says.html
