Selling clients on rising rates and real estate

Joshua Furr

September 14, 2022

If you are in the real estate industry, you may find it difficult to explain the effects of rising interest rates on real estate. The Great Recession lowered interest rates artificially, but now the Federal Reserve has started to raise rates and unwind its massive balance sheet. Rising interest rates are an issue because they make real estate deals less viable. With rising interest rates, the cost of capital also increases. A project that made sense a few years ago may no longer be viable due to the high cost of capital.

Increased buying power

Increasing interest rates and real estate values are negatively affecting homebuyers’ buying power. A borrower’s pre-approved loan amount drops by 5% with every half-percent rise in interest rates. At that rate, a buyer’s $350,000 home purchase becomes $332,500. The average purchase loan is $380,000, meaning the borrower loses between $20,000 and $25,000 of buying power with every half-percent increase in interest rates.

However, rising household income is limiting the negative effect of rising rates on house buying power. Higher rates will reduce affordability, but rising incomes can offset this effect. This tug-of-war between rising incomes and upward pressure on mortgage rates will determine the impact of rising rates on home affordability. The latest data available from the Real House Price Index (RHPI) show that buying power has increased by 1.2 percent from July 2021 to August 2021. However, it is important to remember that the real house price index is updated monthly. The next update is expected to be released on November 29, 2021. While real house prices increased by 1.2 percent between July and August 2021, they still remain a whopping 16.6 percent below the peak of the housing boom in 2006.

Reduced buying power

A rise in interest rates has negative consequences for the job market and the economy. It zaps the liquidity in the market and leads to increased volatility. As a result, market participants reshuffle their portfolios. In addition, they worry that the Fed might get too aggressive and push the economy into recession.

Rising interest rates mean higher monthly payments and less buying power. Additionally, it can reduce the value of a home, especially if it’s in an unattractive neighborhood or requires repairs. Rising interest rates also mean that the amount you can borrow for a home will be lower. This can make your home-buying plans more difficult, so keep an eye on the housing market to ensure you get the lowest rate possible.

Reduced supply of homes for sale

Rising interest rates can be good for home buyers, but they can also make homes less affordable for those who don’t have enough cash. Homebuilders have to pay more to borrow money, and this can put pressure on home prices. It’s best to stay up to date on the latest interest rates and future fluctuations to ensure that your home purchase will be a wise choice.

While higher interest rates may cool down the price of homes in the short term, they can actually make the housing shortage worse in the long run. Rising interest rates will impact the housing inventory three or four years from now. As homebuilders have faced higher costs for building new homes, they will have to pass these higher costs on to homebuyers.

The increased value of homes

While rising interest rates are not always bad, they have an impact on the housing market. As the cost of mortgages increases, fewer people can afford to buy homes. This results in a reduction in the price of homes, which hurts sellers. As a result, sellers often reduce their asking prices to get the attention of buyers. Despite the negative impact of rising interest rates on the housing market, the benefits of a lower mortgage rate are still evident.

A rising interest rate can reduce the affordability of homes, causing some people to rent instead of buy. Rising mortgage rates can increase the monthly payments on a home by thousands of dollars. This has a knock-on effect on homebuyers and investors, as it makes it harder to finance the property.

The impact of rising interest rates on property values

If interest rates increase, home buyers will be less inclined to buy, resulting in an oversupply of housing. This results in lower housing prices. Falling prices are a boon for first-time and experienced homebuyers alike. In this way, the rise in interest rates will alleviate the housing affordability crisis.

Rising interest rates are causing more people to rent instead of purchase properties. While the multifamily market is still relatively strong, the residential sector is starting to struggle. In addition, the number of voluntary refinancings has declined substantially. However, some stronger-positioned clients are refinancing before rates rise even further. This should help mitigate the pulling back of domestic entities.

The impact of rising interest rates on property values is more severe than it seems. Those who have been used to low mortgage rates will not be able to handle a sudden jump in interest rates. However, those who are careful enough to save and spend will be able to weather the shift in mortgage costs. This is especially true when it comes to refinanced mortgages. Despite these concerns, homebuyers should not despair. Here are a few things they can do to prepare for an unexpected rise in interest rates.