In the real estate industry, mortgage lenders, both government-backed and privatized, compete for homebuyers which impacts the monthly interest rates on a mortgage. According to history and research, the average interest rates on 30year fixed mortgages remained low from 2013 to 2021 but have started to increase in 2022. As the mortgage rates remained bottomed up over the last few years, the housing market has been competitive, and home prices have skyrocketed.
Rising mortgage rates shouldn’t be a cause for worry, and understanding the concept can ease the worry of all housing market participants, from real estate agents to home buyers. Let’s look at how higher interest rates impact home sales and different market participants.
How rising interest rates affect the homebuyer
In the housing market, the concept is that rising interest rates make buying and selling a home challenging and vice versa. From a home buyer’s perspective, homes become more expensive when the interest rates increase, especially for first-timers.
Suppose you wanted a 4% interest rate on a 30year fixed mortgage for a property worth $400,000. In that case, your monthly mortgage payment would be $1900. However, it would increase to $2138 if the mortgage interest rate is at 5%. Therefore a slight 1% mortgage interest reduces your purchasing power by a whopping $45,000, making homes less affordable for you.
How rising interest rates affect the home seller
Increasing mortgage rates is a double-edged sword that cuts both ways. Since it makes homes less affordable, that leads to fewer buyers in the market affecting home sellers.
Suppose the real estate agents Richmond, VA want to sell a property at $400,000; they can list the home. However, due to increasing interest rates, the few potential buyers in the market can only afford the property at $335,000. In that case, they would have to sell the property for a lower price than expected. Although they would still make profits on the sale, it depends on how well they play in the market because the 1% mortgage increase diminishes the property value by $45000.
High mortgage rates cut both ways.
The increasing mortgage rates affect both home buyers and sellers, and with lower housing demand, there is less upward pressure on prices. According to research, property value and mortgage interests are highly correlated, but the economy’s health is a large determinant.
If the economy proliferates, then high mortgage rates will not impact property value and prices. This is because a strong economy also allows employers to increase salaries helping homebuyers to compensate for the increased mortgage rates. Therefore as long as the economy grows and wages rise, high mortgage rates will not paralyze the market.
On the other hand, there will be fewer real estate transactions because of tighter lending standards. That means rental properties will rise in demand because more people who cannot afford homes with higher interest rates need them.
The botton line
When mortgage rates increase, it is more costly for consumers to buy homes. Consequently, there is less demand in the housing market, which results in a slump in the industry, and sellers have to reduce their prices to attract customers.