What Happens to Home Prices When Interest Rates Rise?

The Federal Reserve announced its fourth straight 0.75 percentage point increase in interest rates at the start of November 2022, continuing to ramp up its war against a 40-year high in US inflation.

As the year draws to a close and well into 2023, more interest rate hikes to tame inflation are anticipated.

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Higher interest rates mean that borrowing will continue being expensive for both businesses and consumers, an economic pinch that might have a significant impact on US home prices.

How Do Interest Rate Hikes Impact Home Prices?

It’s not always the case that rising interest rates result in falling home values.

However, historical data suggests there is a high likelihood of this happening in the event of a prolonged and significant rise in interest rates.

The drop in housing prices brought on by increasing interest rates is an outcome of several factors including:

  • Mortgages Rates Going Up

Interest rates dictate what banks pay the Fed to borrow money, and this impacts how much you pay for a mortgage, car loan, and credit card debt.

The average mortgage rate has increased to over 7% due to recent interest rate hikes, which is higher than it has been in 20 years and more than double what it was at the start of 2022.

Rising mortgage rates force homebuyers to make larger monthly mortgage payments and considerably reduce their purchasing power.

For instance, your monthly payments would be $1,264 if you took out a 3% 30-year fixed mortgage on a $300,000 home.

You would have to make $1,896 in monthly payments if the Fed raised interest rates and the 30-year mortgage rate grew to 6.5%, as it has this year.

Your mortgage payments would go up by $632 as a result of the increase in interest rates, and that’s before you account for additional costs like property taxes and mortgage insurance. For larger mortgages, the effects are considerably more pronounced.

You’re also substantially limited in how much house you can buy by the rise in mortgage rates.

If mortgage rates rise to 5% following an increase in interest rates, lenders would only be able to provide you with a $355,000 loan if you were eligible for a $400,000 mortgage at 4%.

The 1% increase in mortgage interest rates results in a $45,000 reduction in your purchasing power.

Many would-be homeowners are being turned away from the real estate market or postponing their home purchase because they can’t afford the hefty monthly mortgage payments, which is altering real estate market trends.

  • Demand for Homes Declining

The demand for homes is decreasing, and selling property is taking longer as more Americans continue to be apprehensive about purchasing real estate due to rising borrowing costs.

According to a recent Redfin report, searches for “homes for sale” on Google decreased by 30%+ in October 2022, while sold homes stayed on the market for an average of 33 days, compared with 25 days a year earlier.

Additionally, the number of new listings fell by 19% compared to 2021, which may be attributed to some homeowners delaying selling their properties to avoid paying a higher mortgage interest rate on their next home mortgage.

Other statistics in the report that indicate a slowing real estate market include 30% of homes sold were purchased above the asking price, down from 45% in 2021, and mortgage applications dropped 39% from the past year.

  • Sellers Lowering Prices

Housing inventory grows as a result of low buyer demand and slower home sales.

The increase in housing supply is what ultimately leads to a decline in home prices due to higher interest rates, which have dramatically reduced buying power.

Realtor.com discovered in October 2022 that the number of active listings nationwide jumped 36% from a year prior.

To remain competitive, homeowners are prepared to slash their asking price or, at the very least, accept lower bids because buyers now have more options of properties to look at, and sellers are having difficulty selling their houses.

3 Advantages of Purchasing a House When Interest Rates Are High

The best time to purchase a property is undoubtedly when interest rates are low because you’ll likely enjoy lower monthly mortgage payments.

There are, however, some advantages to purchasing a home now when borrowing rates are skyrocketing.

  • Less Buyer Competition

In times of low mortgage rates, there are frequently too many buyers battling for a limited number of available properties for sale. This usually leads to bidding wars, which drive up prices.

High-interest rates considerably reduce the number of people who get approved for mortgages, which decreases competitiveness.

Because there is less demand for housing, those who are left in the market typically benefit from lower home prices, and they have more wiggle room to bargain with sellers for a reasonable price for a home they are interested in.

  • Homebuyers Have More Options Available

Inventory rises as many potential buyers pull out of the market due to high loan rates. Because of this, you have the option to consider several properties before choosing one to purchase.

If you were looking for a home at the start of the pandemic, when mortgage interest rates were low and demand for homes surged, you had to decide on the spot or within a few hours whether you were going to buy a property after viewing or risk losing it to another buyer.

  • Reduced Buyer Risk

When there is fierce competition for homes, you could make choices during the purchasing process that you later regret.

For instance, you might consent to forego a home inspection to woo a seller who has received many offers, only to purchase an overpriced house that will drain your finances owing to the necessary repairs.

You don’t need to make a hasty decision about buying a home when borrowing rates are high, and demand is low. You can spend as much time as necessary to make sure you purchase the perfect house.

Homebuyers of Pittsburgh: #1 Professional Home Buyer in Pittsburgh

If you’re considering selling or buying a home, it’s a good idea to consult with an experienced real estate professional, regardless of how low or high loan rates are at the time.

Homebuyers of Pittsburgh can help you understand how current interest rates impact your real estate sale or purchase. The team, which has over ten years of combined real estate experience, can also help you find your dream house quickly or sell your property in a few days for a fair price with no stress.

Contact us at 412-444-8914 or info [at] urbanpgh.com right now to find out more about how we can assist you in achieving your real estate objectives in Pittsburgh.