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How Rising Interest Rates Will Impact the Real Estate Market

Rising rates have plenty of effects on home buyers. Recognizing trends is key to navigating these cycles safely.

As of March, reports showed that interest rates have begun to rise rather quickly. In fact, the benchmark 30-year fixed-rate mortgage rose above 3%. This is the first time this has happened since July 2020.


From the previous period, it was up five basis points to 3.02% for the week ending March 4th. This large upward movement in rates likely corresponds with the shift in the bond market. This recorded the highest rise in February since the 2016 election. 


It is also important to remember that, according to research, the current rate is still much lower than the 20-year average of 4.9%. Many parties were worried due to the shortage 0f homes and the effect this had on U.S. real estate. Many are worried that it will become far more expensive to buy a home. 


On top of this, when the interest rate is up, fewer people are likely to borrow. So, if you’re currently looking to find a place, you do have the necessary cause for concern. Though, as you read through this piece, you will find that rising interest rates don’t affect all property locations and sectors.

There are still great deals to search for. Keep reading to learn more about how rising interest rates will impact the real estate market. 



Understanding Interest Rates

When you take on a loan, you will need to pay an interest based on the rate that the lender fixes. The higher your interest rate is, the more you will need to pay over the time it takes for you to pay off the borrowed amount. The same applies to banks and financial institutions when the U.S. Federal Reserve lends them money.



Economic Effects of Rising Interest Rates

Let’s take a look at how an increase in interest rates affects the economy to understand how it will affect real estate:


  • Higher Cost of Borrowing- As interest rates go up, loan and credit card payments become far more expensive. This will likely discourage people from borrowing and decrease their spending. 
  • People Save Rather than Spend- Higher interest rates mean that deposit accounts offer attractive returns so it is better to keep cash in the bank than spend it. 
  • The Value of a Currency Rises- Countries can attract deposits in their banks because of the higher interest. This means that there will be an increase in demand for the currency. This causes value to rise. 
  • Lower Consumption and Investment- The rate increase can do more than curtail spending. Companies will likely reduce investments because they have less confidence in the economy. 
  • Government Interest Payments Increase- Counties borrow money. This means that a rise in the nation’s interest payments could lead to a future hike in taxes.



What Causes Interest Rates to Go Up

There are several factors that influence interest rates in the U.S., including:


  • A Strong Economy
  • U.S Federal Reserve Rates
  • Relationship with Long-Term Bond Yields
  • Lenders’ Actions



The Effects of Interest Rates on the Property Markets

The housing market is directly affected when rate changes occur. This is because most people tend to buy homes by borrowing money or taking a mortgage. Below are some of the most common effects of interest rates on the property market.



Lower Interest Rates

Usually, people borrow whenever the interest rate is low. This is because it will cost them far less than at other times. This means that the level of borrowing will be lower when the rate is high. 


This is because they’ll have to pay extra throughout the term of the loan. The same occurs when it comes to mortgages. People are likely to buy a property when it’s cheaper to borrow for that exact purpose. 


Since more people want to buy homes when the mortgage is cheaper, this means that the property prices almost always go up. Though, when prices become too expensive, the demand can drop entirely. 



Rising Interest Rates

Usually, when interest payments ride, buyers may decide not to take out a mortgage. They will likely defer their home purchase. This reduction in purchaser numbers can often lead to a huge oversupply of dwellings. 


Though, experts say that rising interest rates can have positive impacts on the property market as well. 



Other Effects of Rising Interest Rates

It is not just individual homebuyers who will react to the rising interest rates. Other sectors, which include investors, are likely to be affected too. For those who have a stake in leveraged assets, high rates can often mean lower cash returns. 


This can push the cost of buying investment properties up as mortgage rates go up. Housing loan rate increases will benefit parties who own houses for rental purposes. As potential buyers look to shift from purchasing, they will likely shift their focus into renting. 


This huge uprise in renters will often allow owners to solve their vacancy issues. Rent will go up as supply can’t meet the increasing demand and improve cash flow and income for landlords. 



Will Rising Interest Rates Adversely Affect the Property Market?

An increase can negatively affect the property market. This is because it can soften the demand for homes and buildings. In turn, fewer people would borrow money at a high cost just to buy a house. 


Many people would prefer to wait for cheaper prices. Though, potential homebuyers will be able to handle a slight rise in loan rates that are lower than 1%. Though we remain mindful of increased mortgage rates, it can still affect buyer finances and psychology. 


Many parties have a very conservative view of the market. In fact, it appears that the inflated mortgage rate has a dampening effect on the home buyer’s enthusiasm according to the Mortgage Bankers Association report.



Time Lag Before Effects are Felt

Rising interest rates can take a long time, as long as 18 months, to reveal their overall impact. Those who are midway with their development plan are likely to see it through. Others will take a more cautious approach due to a lack of confidence. 



The Bottom Line

It can be challenging to conclude how rising interest rates will affect the property market because there are many scenarios and factors that can lead to an adverse or positive situation. That is why it's best to instead become familiar with economic and market trends so that you can navigate each cycle safely and effectively.