Unless you’ve been living under a rock, you’ve undoubtedly heard that 2021 had the greatest annual growth rate (10.6%) in over a decade, surpassing the previous high point in 2013.

A variety of factors have been cited as contributing to the rise in home prices. There have been unprecedented demand move-in-ready homes as the pandemic caused extreme construction. In addition,

people are increasingly inclined to invest more money in their homes since a lot of people are working from home and this trend does not seem to be going anywhere anytime soon. Home offices are on the rise and more people than ever are investing heavily in their homes (whether it be a new purchase or remodeling) to create an inviting but work-friendly environment.

AlthoughCovid-19 had a devastating impact influence on certain businesses, such as tourism and restaurants, many others have thrived, such as real estate, online shopping and cryptocurrency.

The Fed, in an effort to stimulate the economy and combat the ramifications of Covid-19 over the last two years, has held interest rates at zero (or nearly zero). Inflation will be close to 7% in 2022, according to forecasts. Based on the Fed’s recent warnings, the rising inflation we’re seeing will likely cause the Fed to increase interest rates during its next meeting on March 15-16.

So, what is the impact of rising interest rates on real estate? Let’s find out!

What would be the impact of rising interest rates on real estate?

If the Interest Rates are Low

Buying real estate while interest rates are low is quite common. The reason people like buying real estate when interest rates are low is because monthly mortgage payments will be lower as a result of lower interest rates. This creates more demand and higher prices because people can afford more expensive homes.

Housing development businesses will also take advantage of the low-interest rates to obtain loans to build new homes. Although Covid-19 created a shortage of construction materials for a while, developers have been building new homes at a record pace to keep up with demand caused by the rock bottom interest rates.

When demand for homes is higher and people can afford more expensive homes, inevitably, property prices will rise and the real estate market will experience a boom. However, if houses become too expensive and wages are not increasing in tandem, demand eventually decreases because people simply cannot afford grossly expensive houses, even with low-interest rates. We all know people who would love to sell their house but simply cannot afford to buy a new house at current prices. At some point, housing simply becomes unaffordable for the average working-class person.

If Interest Rates are High

When interest rates are high, buyers’ monthly mortgage payments will be higher. Higher monthly payments mean that some people cannot afford to pay as much money for a house, so it becomes a delicate balance between finding a house with an affordable monthly payment and finding a house that is desirable. As a result, many people decide to hold off on buying a house because of the high monthly mortgage payment and this decreased demand can create a surplus of homes available for purchase since fewer people are buying homes.

In fact, experts believe that higher interest rates will nevertheless benefit the housing market. Housing prices normally fall when there is supply surplus. This situation provides an opportunity for first-time buyers to finally purchase a home at a more affordable price.

This is why some experts believe that raising interest rates will help to alleviate the home affordability problem by slowing demand and eventually decreasing prices to more affordable levels.

Tips: How to prepare for rising interest rates

Our “READ” strategy assists you in navigating the rising interest rates while looking for solutions to buy your dream house.

  • Relax, homeowners will not be hit hard by interest rate rises since the increases will be gradual. This gives you time to plan and strategize.
  • Examine the loan packages to make sure they match your needs and desires(for example, instead of calculating the cost during the promotional time, calculate the total cost over the life of the package, and seek packages that do not include adjustable interest rates that will increase with time);
  • Analyze the pros and cons of repricing and refinancing (perhaps you need to buy when rates are high and can afford the mortgage for a few years until rates decline again); and
  • If at all possible, delay your purchase temporarily and monitor the STI Index, which typically precedes the property price index (PPI).

Interest rates do not remain constant, at least not for long. Regardless, there are always opportunities for homebuyers to benefit from either rates or prices, depending on whether they are rising or falling in our favor. More particularly, homebuyers should be realistic, open, and honest about their financial situation and purchasing power. Never buy a home that will create financial problems for you and your family down the road.

This post has been all about the impact of rising interest rates on real estate. We hope you now have a better understanding of how this works.

If you’re ready to get rid of your house so you can buy a new one before rates increase, give us a call at (317) 751-7011. We can take it off your hands quickly for cash so you will be well equipped to buy your next home in this competitive market.