Here’s the impact that rising interest rates will have on home prices.
With the recent substantial increase in mortgage interest rates, many homeowners have been asking, “Will this finally cause home prices to drop?” The answer isn’t cut and dry. Rates are predicted to rise even further this year, so buyer affordability could take a serious hit. To give you a better idea of whether your home is poised to lose value in the coming months, I want to address four key points that explain what’s happening in the real estate market:
1. More expensive mortgages. A higher interest rate means a more expensive loan payment, but the rate they’re rising at is astounding. Rates are up 2% since the start of the year, which means the average homebuyer’s affordability has dropped by 20%. This has already priced some buyers out of the market, and if rates continue to rise as expected, it will price out even more of them. This is going to make the pool of potential buyers for your home much shallower, resulting in fewer offers.
2. Increased rental rates. One often-overlooked factor in all of this is rental rates. As homeownership becomes more expensive, rental demand is only going to increase, which means that rent prices will jump up as well.
3. Supply is still short. Although homes are more expensive, the demand for them is still high. The increased interest rates have also caused sellers to stay in their homes longer, and our typical spring and summer surge of inventory just isn’t happening right now. Low supply is good news for homeowners because it will keep your property values up.
“Continued low supply will keep property values up.”
4. We’re not headed for a crash. Some buyers and sellers are rushing to the market in fear of an impending crash. However, there aren’t many parallels between this market and that of 2008 when the last crash occurred. That crisis was the result of irresponsible lending practices. Since then, underwriting standards have tightened significantly.
The current frenzied market has been brought on by basic supply and demand, and any kind of market crash is pretty unlikely. According to Brandon Haefele, CEO of Catalyst Mortgage, “I think we’re now going to start seeing individual markets potentially have some slowdown… my reasoning is we still have extremely low inventory. But it’s not going to go the other way and crash.”
Although rising rates are going to cause some buyers to leave the market entirely, all of the evidence we’ve seen on the ground points to home values continuing to appreciate as long as supply remains this low. This is good news for you if you’re thinking about selling.
I can’t say with certainty what will happen to home prices in the future, but these four indicators give us a pretty good idea of where we’re headed. If you have any questions about what current market conditions mean for you, please give me a call or send me an email. I’d love to help you.