What the New Interest Rates Mean for the Real Estate Market

The majority of people looking to buy a house do so with a mortgage loan. This can be either a fixed-rate loan, an adjustable-rate loan, or a combination of the two. However, it’s not just the loan they have to pay back. Interest rates play a huge role in the amount of money borrowers have to return. If you’re a first-time homebuyer or simply someone interested in real estate, it’s critical to know the ins and outs of interest rates and real estate. This ensures you make a financially sound and informed decision.

In this article, the experienced realtors from Robert DeFalco Realty are delving into interest rates and how they can impact homebuying. Keep on reading to learn how interest rates affect real estate.

How Interest Rates Affect Real Estate

While interest rates do affect real estate, it’s not in the way many people think. Mortgage interest rates don’t affect home prices directly. However, they have a huge impact on supply. This, in turn, affects home prices.

Homeowners determine whether they want to sell their properties based on mortgage interest rates. When mortgage interest rates are low, homeowners are more likely to sell. Since more homes are on the market, buyers have more options to choose from and have a stronger position from which to negotiate.

However, mortgage interest rates rising makes it less likely for people to list their homes for sale. Because of the supply shortage, both demand and price increase. That being said, if rates increase too much, or are higher for a long period, it can affect demand. When this happens, sellers have to lower their prices in order to attract more offers.

Therefore, interest rates have a big impact on the housing market. In addition to determining mortgage rates, they indirectly affect real estate value.

Fed’s Increase in Interest Rates and What to Expect

The Federal Reserve has a major impact on interest rates. 2021 was known for its low interest rates and booming real estate market. With demand at an all-time high and very low supply, it was a seller’s market. Buyers were putting in offers immediately and outbidding others in an attempt to secure a home. This year, much of that can change.

Early in the pandemic, the Federal Reserve’s actions reduced interest rates. This resulted in the lowest interest rates in years and resulted in an extremely competitive housing market where sellers had the upper hand. The most common conclusion is that increasing interest rates and thus mortgage rates will have a negative impact on homebuyers. Home price growth will be affected, and many buyers may also get locked out of the housing market.

Thus, if the Fed increases the interest rates by either purchasing less mortgage-backed securities or selling them, real estate will be affected dramatically. However, it’s unclear how dramatic this will be since different experts have different opinions.

Experts’ Interest Rates Predictions

The Mortgage Bankers Association estimates that the average 30-year fixed mortgage rate will rise from 3.1% to 4% by December 2022. According to the trade group, home prices will fall by approximately 2.5% by the end of 2022. This is the complete opposite of the last year, where home prices jumped up 19.5%.

However, as previously mentioned, not everyone shares this opinion. This is especially true when it comes to home prices. Since there’s still a massive shortage of houses and supply outweighs demand, many experts expect to see home prices continuing to rise. That being said, they’re expected to rise at a slower rate than they did in 2021.

While the Mortgage Bankers Association estimates an increase to 4%, Fannie Mae’s estimate is very different. Fannie Mae’s forecasts estimate the average 30-year fixed mortgage rate to rise to 3.3% by the end of 2022. Furthermore, they expect this number to increase to 3.5% in 2023. Even their 2023 figures are a far cry from the Mortgage Bankers Association’s 2022 estimates.

Additionally, Fannie Mae expects home prices to continue to rise in 2022. Their forecast states that they expect an increase of 7.9% in 2022. While this doesn’t rival 2021, it’s more than double the average since 1980.

However, if the Mortgage Bankers Association’s forecast is accurate, it could result in pricing out many buyers. In fact, some would be completely locked out of borrowing. Since mortgages and loans are based on debt-to-income ratios, this may render them ineligible.

Supply Shortage and Expectations

It should be noted that mortgage interest rates and housing demand and prices may not follow the same pattern they always have. This is because of the current state of the real estate market. The severe shortage of housing has resulted in mismatched demand and supply. According to Freddie Mac, the U.S. demand for houses outstrips supply by about 4 million homes. With this large shortage, anything is possible. Despite more houses being built, the supply can’t come fast enough. This has the potential to keep the power in sellers’ hands for a long time.

Buy and Sell Properties With Robert DeFalco Realty

There’s no denying the complexity of the real estate market. It’s challenging to navigate, especially of late. Fortunately, there’s no reason to do this alone. Whether you need a buyer’s agent or a seller’s agent, Robert DeFalco Realty can help. We have expertise in residential and commercial real estate and can help you with all your needs.

Additionally, since we’re well-versed in current interest rates and mortgage trends, we can advise you on everything from financing options to taking care of open homes and negotiation. If you’re in the New York area, feel free to visit our many offices, including our main Staten Island office. Alternatively, you can call us at 718-987-9700 or get in touch with us here.