Interest Rates Changing: What This Means For Real Estate?

The Federal Reserve began raising interest rates to combat high inflation last July. So, interest rates changing: what does this mean for real estate?

Learn about interest rates, inflation, and real estate.

 

KEY TAKEAWAYS

• Since July 2022 high inflation forced the Federal Reserve to raise lending interest rates.
• As a result, mortgage rates rose too.
• This caused mortgage lenders to tighten their credit standards making it harder to qualify for a mortgage.
• Fewer mortgages led to fewer home buyers pressuring sellers to lower prices.
• Basic supply and demand economics where fewer listed homes sell because of less demand creates price reductions.
• Buyers need to raise their credit scores to qualify for a mortgage.
• Housing investors with cash can take advantage of high inflation and falling prices.
• Fewer potential buyers unable to afford to buy homes means more renters.
• Rising rent prices open opportunities for housing investors.

 

How Lenders Change Interest Rates

 

Private and government-backed lenders compete for home buyers’ business. Lenders change interest rates on home mortgage loans depending on several factors. These include:

• In a strong economy, lenders allow interest rates to rise which can cause higher mortgage loan costs;
• Yet, if salaries and wages can’t rise fast enough housing prices and property values will be affected;
• When mortgage costs rise buyers find homes becoming more expensive which lessens buyers’ demand;
• Less demand hurts sellers forcing them to lower their prices to attract home buyers;
• Fewer mortgage applications hurt lenders’ businesses; and
• Lenders must lower mortgage interest rates to attract more business.

Like most products, home sales depend on supply and demand. Too much inventory (supply) forces down prices. Yet, too few homes for sale means buyers may have to bid on homes due to more competition.

 

Interest Rates Changing: What This Means For Real Estate?

 

Rising mortgage rates impact every aspect of buying a home. Decreasing interest rates make buying and selling homes easier. Yet, rising interest rates make buying or selling homes more difficult.

For example, Susan Home Buyer seeks a 4% rate on a 30-year fixed mortgage for a home worth $400,000. Her monthly mortgage payments are $1,900. Yet, Susan only qualifies for a 5% rate. Her monthly payment becomes $2,138 which is $238 (13% higher).

Thus, if Susan can’t afford the extra $238 monthly mortgage payments she won’t qualify for a loan.

Also, from a purchasing power perspective, Susan will end up paying $45,000 more for her home by the end of the 30 years payments.

Therefore, lenders will reject Susan’s mortgage loan application because they believe she won’t make all the monthly payments. Also, she won’t afford the extra $45,000 through the 30-year loan period.

See how a 1% rise in mortgage interest rates makes a big difference?

 

What Can Buyers Do When Interest Rates Increase?

If lenders tighten credit standards buyers must have a higher FICO Score. A higher credit score is a number that reflects the credit risk of a borrower based on credit history. A higher FICO Score means a greater chance for mortgage approval at favorable rates.

Learn everything about credit scores in our article “How To Raise Your Credit Score Fast”.

 

How Rising Interest Rates Affects Sellers

 

Likewise, sellers suffer from rising interest rates, though differently. Since sellers don’t apply for mortgage loans the problem occurs when potential buyers can’t qualify for a mortgage.

For example (using the same numbers above), John wants to sell his home for $400,000. However, because of rising interest rates, many buyers can only afford a $355,000 home (remember the extra $45,000 above?).

When sellers can’t sell for their listed price, they must lower the price or wait until the interest rates drop. This puts a heavy burden on sellers. Some want to sell to relocate for a better job and can’t move until the home is sold. They may lose their job.

The fastest solution is to lower the listing price. This allows more buyers to qualify for a mortgage for a lower-priced home. Also, adding free incentives to buyers to soften the sales price will help.

 

How Escalating Interest Rates Affect Property Value

Now that you learned how escalating interest rates affect buyers and sellers, what about property values?

Housing prices and property value correlate to the health of the economy. A fast-growing economy is not affected greatly. Back to our first example, a 1% mortgage rate increase of an additional $238 monthly payment usually means little with employers increasing salaries in a strong economy.

A growing economy creates job and wage growth. Thus, rising interest rates won’t paralyze the housing market.

On the other hand, a slowing economy with rising interest rates could lead to a recession and a housing market crash. Will that happen? No. Why? Read our recent article asking: “Are We Heading Into A Real Estate Market Crash?”.

What we are going through now is a “housing market correction” with the Fed trying to lower sales prices by raising interest rates to create a more affordable buyer’s market. That’s why our recent articles can help you decide about:

• “What Will Happen With The Real Estate Market In 2023?”;
• “Real Estate Forecasts For Next 5 Years”;
• “Why Now Is The Best Time To Invest In Real Estate”; and
• “Why Now Is Best Time To Buy A House In San Diego”.

 

Got Questions?

How Growing Interest Rates Affect Real Estate Investing

 

Back to the supply and demand concept. Expanding mortgage rates mean an increase in rental properties because fewer buyers qualify for a mortgage. Thus, they must rent instead of buy.

Also, growing interest rates mean fewer real estate purchases because lenders will tighten lending standards along with increased mortgage payments. Again, more potential buyers become renters until they can afford a mortgage.

Because of an increase in rental properties and rent prices housing, investors get an opportunity to profit. Also, rising interest rates reduce sales prices. So, it’s cheaper and easier to buy during rising interest rates. Plus, profit from the rising rents.

 

How Inflation Affects Housing

 

Bankrate describes, “Inflation is the process through which money loses purchasing power.” Inflation causes all consumer goods prices to increase. Noticed how food, gas, entertainment, and rents increased?

What does high inflation do with housing investments?

Forbes sums it up nicely, “historically, real estate does well during inflation.” Also, “when prices are rising, property can often be a favorable place to have your money.”

Real estate values rise during inflation. That’s why the Federal Reserve (Fed) raised interest rates to combat inflation. Higher interest rates mean fewer loans and less debt by American consumers. The Fed’s actions helped to raise mortgage interest rates causing fewer buyers which pressures home sellers to lower their prices.

Learn from our recent article about inflation and rising interest rates affecting the housing market.

Find out how rental property investing protects you from inflation by viewing our article “Should You Buy Rental Properties Now Or Wait?”.

 

Interest Rates Changing: What This Means For Real Estate? – Conclusion

 

So, interest rates changing: what this means for real estate? First of all, rising interest rates indirectly cause mortgage rates to climb. This causes fewer buyers to afford mortgages. Fewer buyers result in home sellers lowering prices.

Tip: Lower home prices are good for buyers (and investors) with cash to avoid mortgage costs. Less competition between buyers. More motivation for sellers to offer incentives and extras.

 

Work With The Best Realty in San Diego & 49th Best in the U.S.

 

That’s right, we’re highly rated in the U.S. and the best in San Diego.

Best in San Diego: Big Block Realty was recognized in 2022 as the Best Brokerage in San Diego for four straight years (2018 – 2021) by the LocalBest.com site.

Big Block Realty, recognized as the 49th Best Independent Real Estate Brokerage in the U.S. in 2022 out of 106,000 real estate brokerages by

The Wall Street Journal partnering with Real Trends Rankings.

Contact us today to learn more about what interest rates changing means for you as a buyer, investor, or seller in San Diego county.

 

Steven Rich, MBA – Guest Blogger

 

 

 

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