In response to the COVID-19 pandemic and rising inflation, the Federal Reserve has raised its interest rates, sending a cascade of rate increases across the lending industry. Whether you’re buying, selling, or investing in real estate, these rate increases will surely affect your bottom line. So, what impact will the increased interest rates have on the real estate market?
Despite the rate hike, we’re still in a historically favorable borrowing market, and the downstream impacts of rate increases don’t always leave you with less money in your pocket. While interest rates determine the size of mortgage payments, they also shape the ebb and flow of real estate transactions, with rising rates tending to push more people toward renting. If rates climb enough, the market could crater, sending prices crashing and opening up new opportunities for investors. Our prediction, given the variables at hand, is that the interest rate hike is part of a housing market normalization that will lower housing prices and reduce the record-breaking competition that has defined the market for the last year.
Advice for Buyers
If you’re in the market to buy a home, rising interest rates are a double-edged sword. On the one hand, if you’re like most people and will use a mortgage to purchase your home, rising interest rates reduce your relative “purchasing power,” pushing certain properties out of the range of your budget. On the other hand, properties that might have been slightly too expensive for you before the rate hike might come down in price as competition wanes. Without a crystal ball, it’s impossible to time the market perfectly, and every client’s needs are unique, so our advice will be different for people with a deadline for purchasing a primary home than it will be for people who are looking to buy a second home as a vacation or investment property.
Advice for Sellers
The opposite is true for those looking to sell their property. As interest rates climb, the amount you can expect to sell for declines, as more of a buyer’s budget is eaten up by interest payments. If interest rates increase too quickly, it can cause a market crash, sending home prices into a downward spiral. That said, today’s 5% rate is still lower than the historical norm, which went as high as 10.19% in the 1980s and sat at 6.41% before the Great Recession of the late aughts. As such, though the recent selling frenzy may have passed, there’s little reason to expect a true crash.
Advice for Investors
Even with interest rates on the rise, investing in real estate is still a solid proposition, as real estate values almost always increase at a higher rate than the interest rate. With a national average of 3.5% increase in real estate value per year, even a 5% fixed-rate mortgage will ultimately pay for itself once the property is sold. Even better, as rising rates drive more people toward renting, investing in rental properties becomes more lucrative.
Whether you’re looking to buy, sell, or invest in real estate, it’s important to work with a team of industry veterans like those at Byson. We’ll leverage our combined experience to help you survive and thrive in this ever-changing market. Reach out to us before you jump in, and we’ll take the first step together.