Recent media reports that mortgage rates rose at an alarming level. That’s why we ask the question: “Rising Interest Rates: What It Means For Real Estate Market?”
On June 16, 2022, CBS News reported: “Mortgage rates in the U.S. jump by most in 35 years”. The Federal Reserve raised the interest rate from 5.23% to 5.78% to combat high inflation.
Not to be left out, ABC News followed by clarifying the interest rate increase was the “biggest one-week jump in 35 years”.
KEY TAKEAWAYS
- U.S. mortgage rates rose to 5.78% on June 16, 2022.
- It was the largest jump in one week over the past 35 years.
- Investopedia claims this will result in less demand for home buyers who can’t afford it.
- Applying supply and demand economics, sellers will reduce prices resulting in fewer profits.
- Rising interest rates will affect property values.
- Yet, timelines determine if sellers can wait out the current interest hikes or must sell to relocate.
- A fast-growing economy will outweigh rising mortgage rates.
- Historically, a 5.78% mortgage rate is nothing to fear.
- Will rising interest rates cool the hot real estate market?
- Do buyers or sellers win with rising interest rates?
- What is the bottom line?
Our Explanation of Rising Interest Rates and What it Means for the Real Estate Market
According to Investopedia:
What Does This Mean for Sellers?
Reduced demand hurts sellers forcing them to lower home prices to attract buyers.
It’s the basic business principle of supply and demand. When a product becomes too expensive sellers must reduce their prices. This results in lower profits.
From 2013 to 2021, 30-year fixed mortgages remained low. Yet, 2022 brought higher interest rates. Now, the rates just jumped in mid-June the fastest in the last 35 years.
Understanding Rising Interest Rates and Homebuyers
The real estate market shifts when interest rates rise making selling and buying a home tougher. When interest rates decrease, selling and buying become easier.
For example, if Sally Home Buyer wants a 4% rate on a 30-year fixed mortgage on a $400,000 home, her mortgage payment is $1,900 per month. Yet, if Sally Home Buyer only qualifies for a 5% rate on the same mortgage, she will pay $2,137 per month. That 1% increase results in an extra $237 or about 13%. How does this affect homebuyers?
Homebuyers experience a decrease in affordability when mortgage rates increase.
In the above example, Sally only qualifies for a 5% mortgage rate which means lenders can only offer her a $355,000 loan when she wants to buy a $400,000 home. That leaves her $45,000 short on her dream home! Her purchasing power is reduced by 11.25% by the 1% mortgage rate increase.
Understanding Rising Interest Rates and Sellers
When buyers lose their purchasing power, sellers also lose. The Smith family wants to sell Sally their home for $400,000, Sally can’t afford it. What does the Smith family do? Wait for another buyer who can afford the listing price? Or, sell to Sally for $45,000 less?
Can the Smith family afford to wait? Not if they are under a timeline like having to relocate to another area with a job offer. A seller’s timeline dictates waiting or needing to sell quickly.
If sellers can afford to wait until interest rates drops expect listings to fold until another time.
Fewer listings mean less supply. Under the supply and demand model, fewer supplies may lead to higher demand. That’s because buyers may have their own timelines to buy now rather than waiting. If Sally got a better job offer in another city she must relocate to buy and move in time for the new job to start.
How Rising Interest Rates Affect Property Values
Yes, rising interest rates will affect property values. According to Investopedia, housing prices and property values directly relate to mortgage rates. Yet, both depend upon economic health.
A fast-growing economy will outweigh rising mortgage rates. How? If salaries and wages rise consistently with mortgage rates. For example, if mortgage rates rise by one point (1%) monthly payments will increase by $237. Yet, only if a strong economy increases salaries enough to correspond with the rising interest rate. For instance, if Sally earns $237 more per month, she can keep up with the rising interest rate.
Thus, if the economy (jobs and wages) grows at the same pace as interest rates there is no problem. Rising interest rates will not paralyze the housing market.
Buy or Sell?
Historically, a 5.78% mortgage rate is nothing to fear. According to the federal mortgage lender Freddie Mac, their data shows this rate is still lower than in the past.
During the subprime mortgage crisis 2006 Great Recession, the average mortgage rate was 6.41%. In 1996, it was 7.81%, and in 1986 it was 10.19%. Source
How Does Higher Interest Rates Affect Mortgage Companies?
Rising interest rates earn larger profits for mortgage companies and banks. Yet, when interest rates reach too high, buyers quit applying for mortgages resulting in fewer profits. That’s bad for business.
Which Is Better, Lower Interest Rates or Lower Closing Costs?
Experts often recommend lowering closing costs when interest rates get too high. This could encourage buyers to take out mortgages and buy more homes.
However, the best option is to determine the total costs of buying a home. Thus, reducing escrow fees and other closing costs comes down to numbers and math.
Yet, reducing interest rates over 30 years (if you don’t refinance) results in lower monthly fees and lower overall interest paid during the 30 years of the mortgage. This amounts to thousands of dollars saved.
Will Rising Interest Rates Cool the Red-Hot Real Estate Market?
Forbes predicted in May 2022 that rising interest rates to fight inflation will stem the rise in home prices along with everyday purchases like household supplies and groceries. Also, higher interest rates mean a higher return on your bank savings accounts. Yet, that won’t offset higher mortgage rates to buy a home.
Rising mortgage rates mean fewer buyers competing for the few homes for sale. This may end the current home bidding wars seen across the country. If you are going to list your home for sale while bidding wards occur, read out an informative blog post advising buyers on “How To Win a Home Bidding War”.
Even with rising interest rates, if the supply of homes for sale remains low buyers needing to move will still buy homes. As a seller, fewer buyers in a bidding war still means you can sell higher than your listing price.
Got Questions?
Who Wins With Rising Interest Rates, Buyers, or Sellers?
Buyers with cash always win during times with high mortgage rates. An all-cash buyer doesn’t need to borrow money. Plus, this gives greater leverage with sellers seeing less qualified buyers.
Buyers with enough cash for a larger down payment also win. Reducing their loan amount means a smaller loan offsetting the higher interest rate.
Sellers needing to sell know they can buy their replacement property for less. Especially, if the seller buys a home in another location less expensive. Moving from a city with higher prices to another city or state with lower prices means the sales proceeds can buy more.
What Is The Bottom Line?
Don’t try to become an economist. The federal government can reduce interest rates once the current rise successfully combats the rising inflation. Political experts predict this will happen before the 2022 elections in November. Since the current administration does not want to lose in the Senate and congressional races, claiming a healthy economy well before the November elections will help them. Source
Don’t Panic! As for the bottom line, the best mortgage for you depends on getting the right advice from real estate experts like your Realtor and mortgage broker or lender. They can help you as a buyer determine what you can afford. Also, they can help sellers with what they can do with their sales profits.
Rising Interest Rates: What It Means For Real Estate Market? – Conclusion
- When interest rates rise, so do mortgage rates. What does it mean for the real estate market? Here’s a summary:
- Rising mortgage rates mean buyers afford lower prices;
- Sellers will experience fewer buyers;
- Fewer buyers may force sellers to lower their prices;
- Sellers not relocating soon my wait out the temporary interest hike;
- Sellers needing to relocate must sell, but may have greater leverage when buying;
- Buyers with cash will win during a high-interest rate market;
- Buyers able to pay higher down payments can apply for smaller loans to outweigh rising mortgage interest rates; and
- Sellers needing to sell can have greater buying power in another area with lower home prices.
Need to Buy or Sell a Home in San Diego County?
Big Block Realty can help both buyers and sellers with these higher mortgage rate times. We handle buying and selling all types of homes and houses in the greater San Diego area.
List or Buy a San Diego Home with the Best!
Big Block Realty has won awards and recognition as the Best Real Estate Brokerage in San Diego for 4 Years in a Row (2018 – 2021) by the LocalBest.com site. View screenshots of our awards at “Best 100% Commission Real Estate Broker San Diego 2022”.
Big Block Realty is now the 49th Best Independent Real Estate Brokerage in the U.S. out of 106,000 real estate brokerages by The Wall Street Journal partnering with Real Trends Rankings.
View screenshots of our awards at: “Big Block Realty Named in Top 100 RE Brokers in The United States”.
Contact Us for a free consultation with one of our Realtors to see how rising mortgage rates affect your home sales profit or home buying power in San Diego County.
Steven Rich, MBA – Guest Blogger
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Steven Rich, MBA has been involved in the real estate industry for over 30 years. As an investor, real estate agent, associate editor of a real estate magazine, a real estate marketing expert, a Wikipedia real estate article author, and as a writer.
