The real estate market is in turmoil in the face of rising mortgage rates. Although most experts advise buyers, sellers and agents not to worry, there is still a major concern. Now people are even more stressed as the Federal Reserve decreed its second straight interest rate hike of 0.75% to counter rising inflation.
The Fed made several comments regarding the increase that may provide insight into the current and future market. Let’s take a look at what’s to come.
Here’s what Fed Chairman Jerome Powell had to say about the recent interest hikes:
“As the monetary policy stance tightens further, it will likely become appropriate to slow the pace of increases as we assess how our cumulative policy adjustments affect the economy and inflation.”
“Think of what a recession is. It’s a general decline in many industries that lasts for more than two months. The real reason is that the job market has been such a strong signal of economic strength that it makes you question the GDP data.
“We believe it is necessary to slow growth. Growth will slow this year for several reasons. We actually think we need a period of growth below potential in order to create some slack.
So what does this mean for today’s market? Here are some ways interest rate increases will impact the real estate market:
For home buyers:
Lower loan amounts: Rising interest rates mean that payments will be higher, so buyers will qualify for lower loan amounts. This could be particularly difficult for first-time buyers who will have to compensate for low loan amounts with higher down payments.
Difficulty finding homes in your price range: While some sellers will have to lower prices to compensate for rising interest rates, that won’t happen right away, especially since interest rates are still historically low. This could mean that some buyers are overpriced.
Higher mortgage payments: The federal funds rate sets the lending rate between banks and credit unions. Banks that borrow at the federal funds rate must charge a comparable rate to people who borrow from them. Thus, an increase in Federal Fund rates leads to higher mortgage rates, credit card rates and car payments.
Consider renting rather than buying: With rising interest rates, some people may delay buying and choose to rent instead. However, rising mortgages will also increase rents. Rents can rise even faster than mortgages.
For door-to-door sellers:
Fewer interested buyers: High interest rates mean fewer people will be interested in buying, so homes will sell more slowly and generate less profit.
Finding new accommodation can be difficult: Limited inventory can make it difficult for sellers to find a new home.
Your house can sell for less: Many sellers are having to lower their prices to compensate for rising interest rates and the lack of buyers.
Adjustable-rate mortgage loans are increasing: If you have a variable rate mortgage, it could go up. However, this will depend on the limits of your mortgage contract and the difference between your rate and the current market rates at the time of the adjustments.
Refinancing can be difficult: If you’re looking to refinance, you’re unlikely to get a lower rate if you’ve recently taken out a new mortgage. However, rising prices could increase your equity, which would be beneficial in situations such as debt consolidation.
For example, your home interest rate is likely to be lower than your credit card interest rate. This could allow you to defer debt on your mortgage and pay it off at a lower rate.
Fed actions will play out differently in different states. Here’s what that may mean for some regions, including yours.
Florida: Many Florida home sellers respond to rising interest rates by lowering their prices, which helps first-time buyers. However, buyers are still cold-eyed, prompting them to stay in their apartments. While some areas of the state are affordable, others are quite expensive, leaving potential buyers between a rock and a hard place.
Commercial and multifamily loans and borrowings do not fluctuate much despite higher rates.
Arizona: Rising interest rates in Arizona are causing many people to continue renting, but so far the market remains a seller’s market. Some houses receive several offers. But the state sees fewer buyers looking to waive requirements in order to make their offers more attractive.
Texas: First-time buyers in Texas are especially struggling to buy homes due to falling lending rates and rising interest rates. At the same time, in parts of Texas, such as DFW, the rise in home prices happened too quickly and caused the rate of mortgage applications to plummet. Although this is not good news, it has benefited buyers by not making every home purchase a bidding war where they will have to pay more than the asking price.
Rising interest rates are forcing some potential buyers to wait, but we still see a seller’s market in many regions. Most experts advise those who can afford it to go ahead with their real estate deals as rates are still low and no one really knows what the future holds.
Chris Heller is a real estate industry expert, bestselling author and currently serves as Director of Real Estate at Ojo Laboratories.
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