What Rising Interest Rates Means for The Real Estate Market

Being able to afford a home has grown more complex as home prices have soared and interest rates increased, according to a recent report from ATTOM Data. You, like many, may be asking yourself why have the interest rates jumped and how does that impact the local estate market? 

How do current interest rates compare historically?

In the last 40 years, interest rates have fluctuated, with an all-time high of 18.63% in 1981. Lending Tree states, “the mortgage rates trend continued to decline until rates dropped to 3.31% in November 2012 — the lowest level in the history of mortgage rates. To put it into perspective, the monthly payment for a $100,000 loan at the historical peak rate of 18.63% in 1981 was $1,558.58, compared to $438.51 at the historically low rate of 3.31% in 2012.”

Why have interest rates jumped?

Since December 2021, the average mortgage interest rate has increased from 3.10% to 4.17% in March 2022. According to Freddie Mac, the surge from the first quarter of 2022 was the fastest three-month rise since 1991. In just one week (April 14-21, 2022), Freddie Mac’s weekly report stated the average 30-year fixed-rate jumped from 5% to 5.11% between April 14 and April 21.

Soaring inflation and multiple planned hikes from the Federal Reserve have caused interest rates to surge. 

How do higher interest rates impact the local real estate market?

When rates rise, many want to know how it will affect the local real estate market, especially if you are considering buying or selling a home. It is easy to assume that lower interest rates equal more buyers, and higher interest rates keep them away, but is that true?

Not necessarily. Interest rates are only one piece for potential buyers to consider. With the pandemic, more people are working from home and continuing to do so, which means they have more freedom to buy in more affordable areas, no longer having to consider a commute. 

In addition, with rent increasing, potential home buyers may choose a higher interest rate over higher rent. 

Do experts predict a crash in the market?

As home prices soar and rates increase, many wonder if a market crash is looming. 

In a blog post dated March 29, 2022, The Federal Reserve Bank of Dallas wrote, “Based on present evidence, there is no expectation that fallout from a housing correction would be comparable to the 2007–09 Global Financial Crisis in terms of magnitude or macroeconomic gravity.” The authors continue that excessive borrowing is not a factor in the boom as it was in the 2000s. 

The Federal Reserve Bank of Dallas authors conclude that due to “advanced tools for early detection and deployment of warning indicators,” all market participants (banks and policymakers) are better equipped to react and “avoid the most severe, negative consequences of a housing correction.”

According to the experts at Ramsey Solutions, it is unlikely that the market will crash in the next few years. They, too, state that the housing market is much different and more informed than it was during the crash in 2007-2009. 

Time Magazine also does not predict a crash. The author noted the similarities between the housing market during the last crash and today’s market. Housing prices were up and unaffordable for many buyers. But according to Robert Dietz, chief economist at the National Association of Home Builders, “Mortgage underwriting was considerably looser back in 2006. It was easier to get a mortgage to speculate in the housing market. That is not the case today.” Of course, no one can fully predict if or when a housing market will crash. We suggest working with one of our agents and a trusted lender to make the best and most informed decision in buying or selling your home.