How interest rates affect the real estate market
How interest rates affect the real estate market

The current news on interest rates is not very good. Inflation has prompted the Federal Reserve to raise interest rates to curb inflation, increasing the cost of borrowing — including mortgages for would-be home buyers.

“Higher rates mean higher monthly mortgage payments, which result in less buying power for home shoppers. Prospective homebuyers today will not be able to afford as large a mortgage as they would have just a few months ago,” Richard B. Whitman, vice president of Texas Mortgage, LLC, a mortgage servicer for Texas Credit Unions.

While rate hikes may come as a surprise to buyers, they are part of the ebb and flow of mortgage rates. If you’re serious about buying, now is the time to act, experts say.

“For potential homebuyers, rising interest rates essentially means it’s time to take a look at their personal finances and take action,” said Carly Wimer, vice president of secured rate mortgages. The historically low interest rates seen were never intended to last; they were just part of the Fed’s plan to provide temporary relief to the economy during the COVID-19 pandemic and avoid a full-blown economic collapse.


“As the Federal Reserve begins to scale back its efforts to mitigate the outbreak, interest rates began to rise in November 2021. As interest rates continue to rise, it is important that potential home buyers remain calm and discuss their options with a trusted financial professional.”

Financial impact of interest rate hikes

For every 0.5 per cent increase in interest rates, a home buyer’s purchasing power falls by about 5 per cent, Wimer said. If a borrower on a $350,000 property had been pre-approved and interest rates rose by 0.5 percentage points, buyers could now expect their purchasing power to drop by $17,500, she said. That pre-approval will drop to $332,500.

So, if a borrower is pre-approved for a purchase price of $350,000, every 0.5% increase in the mortgage rate will reduce purchasing power by about $17,500.

The average home purchase loan is $380,000, and for every 0.5 percent increase, mortgage payments typically increase by about $120, he said.


Impact on the real estate market

In recent years, we have seen a red-hot real estate market. In March 2022, house prices rose by 17.5% compared to the previous 12 months, according to CEIC data. The good news, Whitman said, is that the housing market is likely to cool — at least it will — giving some homebuyers a chance to stay in the market despite rising interest rates.

“That could lead to a slowdown in sales, which could lead to stabilizing or falling home prices in the future,” Whitman said. “While we haven’t seen that yet, if rates remain high or continue to rise, we would expect this type of correction in the market.”

He continued: “While technically it is still a seller’s market, it is slowing down. A year ago, submitting an asking price was the norm. Today, it makes sense to make an offer on request. While purchasing power has declined, with the Conditions for homebuyers have become more favorable as prices stabilize and property inventory improves.”


Lock in pricing

While home prices are higher than they were a year ago, Wimer said, buyers should set prices now to help them find a home and make an offer.

“I recommend that home buyers work with lenders that have lock-in and store programs that allow pre-approved buyers to lock in their mortgage rates – in some cases for up to 90 days – when searching for a home,” she said. “For homebuyers looking to buy new construction, I recommend working with a lender that offers extended rate locks. Most lenders can only lock in interest 60 to 90 days in advance, but some lenders have advanced lock-in programs that can lock in for up to 12 months. These are the two best ways to protect your pre-approval and maximize your purchasing power in an extremely volatile market.”

Today’s rates don’t have to last 30 years, Wimer said. Refinancing is possible if interest rates fall again.

“When it comes to real estate, everyone needs a house to live in, and rent is definitely not going to be cheap,” she said. “If you can afford it, buy a house. At some point in the future, there will be an opportunity to refinance because interest rates are like an endless roller coaster: they will go up and down again.”

So learn more:

Jake Smith

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Jake Smith

He is the editor of Eragoncred. Previously, he was editor-in-chief of Eragoncred and a financial industry reporter. Jake has spent most of his career as a Digital Media journalist and has over 10 years of experience as a writer and editor.