Rising Interest Rates In A Fast Paced Market

Will Rising Interest Rates Put An End To Our Fast Paced Market?

Buoyed by mortgage rates that plummeted to all time lows last December and January, and economic optimism with COVID-19 vaccines becoming available, home prices rose 11.1% over the past year nationwide, the biggest jump in almost 15 years. However, according to Realtor.com, economists see monthly price gains beginning to slow and warn that rising mortgage interest rates could pose a different affordability challenge later this year.

The combination of sky-high prices and climbing mortgage interest rates are giving prospective buyers less purchasing power. According to the Mortgage Bankers Association, mortgage applications countrywide are beginning to fall and rates are now expected to reach 3.6 percent by the end of 2021. Their forecast three months ago called for rates to hit 3.5 percent in late 2021.  While this may look like a small increase, it just makes sense that when the economy is strong, interest rates will rise.

Does this spell the end of our booming real estate market in our area? 

Not quite! 

Indeed, as rates rise, affordability may become an issue for some buyers on the edge. As these buyers pull back from the market and sellers adjust their expectations, house price appreciation could adjust. However, continually improving economic conditions, a healthy labor market, still historically low mortgage rates and the ongoing shortage of supply relative to demand in our area continue to support house price growth. 

Today’s 30-year fixed mortgage rates are hovering near 3%, but an increase to 5% or more in the future is completely possible when one understands the conventional wisdom of a strong economy coming out of the pandemic affecting mortgage rates. Rising mortgage interest rates are nothing to fear.  In fact, whether you are in the market to purchase a home or to sell, understanding the effect of mortgage rates will help you become a knowledgeable consumer.

How do mortgage rates affect buyers?  Those savvy in real estate know that rising interest rates make it more difficult to purchase because you qualify for less. When you have decreasing interest rates, buyers qualify to borrow more money, making buying easier. Rising mortgage rates affect sellers as well, though differently. So, with rising interest rates, the pool of potential buyers for a home can afford less.  Therefore, while a seller can still make a profit on the sale, it can diminish the property’s market value.  Therefore, as a seller, your profit will depend on how well you play the market.

Yet, if the general economy grows fast enough, as we are currently seeing, rising mortgage rates will not have as great an effect on property value and housing prices. For example, if mortgage rates increase one point, monthly payments could increase by $238. However, in a strong economy where the labor force is in demand, employers are also increasing salaries to attract employees…many times at a rate that more than compensates for the rising interest rate.  As long as the economy continues to grow and we continue to see job and wage growth, a rise in interest rates should not paralyze the housing market.

The effect of rising interest rates can also positively affect real estate investing. Remember those buyers we discussed earlier that were on the fringe of qualifying for a mortgage? The market for rental properties will increase because those people will now be looking to rent. 

And buyers: purchasing a home today as mortgage interest rates are rising, particularly with such low increases, is no reason to despair. From an objective standpoint, even if interest rates were to go as high as 5% at some point in the next year or so, this mortgage rate is still remarkably low compared to historical comparisons. According to Freddie Mac, 30-year fixed mortgages have not reached 5% since 2009. In 1996, the average mortgage rate was 7.81%, and 10 years earlier than that in 1986, the average mortgage rate was 10.19%.

Interest rates remaining near historic lows bodes well for buyers, and today’s market reflects some of the cheapest debt a home buyer will be able to attain in the market.

Most importantly, finding the right mortgage depends on receiving the right advice from a seasoned real estate expert. Working with a well versed ERA Martin Associates Realtor enables prospective buyers, sellers and investors to feel more knowledgeable, confident, and secure with their financial decisions.