How Do Rising Interest Rates Affect the Housing Market?

How Do Rising Interest Rates Affect the Housing Market?

When interest rates fall, property values often increase. When they go up, it costs more to borrow, so buyers have less to spend on their monthly payment. The Federal Reserve recently raised interest rates by a quarter of a point and says there are more hikes in the future. Some experts think it will have a negative effect on the housing market. Others think it may improve home sales. Here are the views from both sides to help you make your own decision.

Higher Rates Could Drive Sales and Increase New Loans

Many economists feel higher interest rates are good for real estate and will boost sales over the next year. Here are some of the reasons why.

Rate change affects consumer psychology. People who have been thinking about buying a home, but hesitant to commit, have another reason to get off the fence. Many of them will scramble to find a home before rates go up again.

Rate hikes change lending standards. When interest rates are low, lenders are less motivated to make loans. If applicants have borderline credit, there’s not enough profit in the loan to make it worth the risk. Lenders would rather hold on to their money and wait for a more qualified applicant. When interest rates go up, banks get more back for every dollar they lend. Higher profit makes lending more attractive, even when applicants have less than perfect credit.

Rising interest rates reduce home refinance loans. Homeowners already have rates as low as they’re going to get, so they stick with their original mortgages. Since banks aren’t making interest money on new refinance loans, they are more likely to approve new mortgages to make up the difference.

Interest Rates Could Raise Home Prices and Reduce Sales

Higher mortgage rates historically decrease affordability. Last September, the average rate for a 30-year fixed mortgage was around 3.3 percent. The payment on a $300,000 home would be just over $1,000 for buyers who purchased their home with 20 percent down. By December rates were up to 4.17 percent. The same home loan cost an extra $117 a month. Homeowners end up having to pay more money for the same value when rates rise.

High rates decrease the number of homes on the market. Homeowners may stay put longer to retain low-interest rate loans that originated in the past. Fewer available homes drives up cost.

When interest rates are low, inflation goes up. The price of materials increases for new homes, driving up prices.

Interest rates will continue to go up through the rest of this year and into next. If you’re selling your home, fewer available houses may allow you to ask for a higher price. If you’re buying a home, while you’ll pay more in mortgage interest, getting a loan may be easier. Either way, the higher interest rates go, the more you will pay in interest on new home loans.

Every area is different, so it’s important to work with a realtor who understands your local economy and knows area real estate values. The team at Hire Realty knows the current market. Whether you’re buying or selling, we have the tools and the expertise to represent you in Westchester County. Contact us today to find out more.


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