Published July 8, 2022
Will Rising Rates Cause Prices To Drop?
Here’s the impact that rising interest rates will have on home prices.
With the recent substantial increase in mortgage interest rates, many homeowners have been asking, “Will this finally cause home prices to drop?” Some people are even worried that the market will crash. The answer isn’t cut and dry. In a market where rates are predicted to rise even further this year, buyer affordability could take a serious hit, but the market isn’t going to crash. To give you a better idea of whether your home is poised to lose value in the coming months, I’m going to address four key points that explain what’s happening to buyers in the real estate market and what you can expect in the future if you’re thinking about selling.
1. More expensive mortgages. A higher interest rate means a more expensive loan payment, but the rate at which they’re rising is astounding. Rates are up 2% since the start of the year, which means the average homebuyer’s affordability has dropped by 20%. This has already priced some buyers out of the market, and if rates continue to rise as expected, it will price out even more of them. This is going to make the pool of potential buyers for your home much shallower, resulting in fewer offers.
2. Increased rental rates. One often-overlooked factor in all of this is rental rates. As homeownership becomes more expensive and more out of reach for some buyers, rental demand is only going to increase, which means that rent prices will jump up as well.
“Continued low supply will keep property values up.”
3. Supply is still short. Although homes are more expensive, the demand for them is still high. The increased interest rates have also caused home sellers to stay in their homes longer, and our typical spring and summer surge of inventory just isn’t happening right now. We’ve had about one month of supply for the last few years. Low supply is good news for homeowners because it will keep your property values up. Demand is only just starting to let up, and a balanced market would have a 12-month supply of homes, so we have a ways to go.
4. We’re not headed for a crash. Some buyers and sellers are rushing to the market in fear of an impending crash. However, there aren’t many parallels between this market and that of 2006. The last crisis was the result of irresponsible lending practices and the low quality of buyers in that market. Since then, underwriting standards have tightened significantly and buyers are more qualified than ever.
The current frenzied market has been brought on by basic supply and demand, and any kind of market crash is pretty unlikely. According to Brandon Haefele, CEO of Catalyst Mortgage, “I think we’re now going to start seeing individual markets potentially have some slowdown…my reasoning is we still have extremely low inventory. But it’s not going to go the other way and crash.”
Although rising rates are going to cause some buyers to leave the market entirely, all of the evidence we’ve seen on the ground points to home values continuing to appreciate as long as supply remains this low. This is good news for you if you’re thinking about selling.
If you have any questions about selling your home or the real estate market in general, don’t hesitate to reach out via phone or email. I look forward to hearing from you soon.
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