Will Increasing Mortgage Rates Impact Home Prices?

The pandemic caused major changes in interest rates. Any realtor will tell you that this has had an interesting knock-on effect on home prices. Here, we will examine what happens to home prices if interest rates rise, and what the future holds for 2022 and 2023.

The pandemic has had a major impact on economies, resulting in interest rates increasing and decreasing. The rise and fall of interest rates has had a ripple effect on other parts of the economy, including real estate. Let’s examine how interest rates have impacted real estate. We will look at what happens when home prices rise and how mortgages change.

What does the interest rate have to do with mortgages?

What is the process of mortgages?

Let’s begin at the beginning by explaining how a mortgage works. A mortgage is required by many people who purchase houses. This means they borrow money and pay it back over time. The loan amount and loan terms determine the monthly mortgage payments. For example, a $300,000.00 loan with a 30-year loan term would have a smaller monthly payment than the same mortgage over a 20-year loan term.

You will pay both the principal amount (which represents the total amount you owe) and the interest when you repay a loan. In order to reduce the risk of lending money, lenders must charge interest. The type of mortgage will determine whether the interest rate is fixed or adjustable.

The economy is one of the factors that determine interest rates. The central bank sets the interest rate. Therefore, the economy is a key factor in determining whether interest rates will be higher or lower. This is based on inflation as well as the cost of debt.

Mortgages and the impact of interest rates

Because mortgage interest rates are tied to the Federal Reserve Bank’s interest rate decisions, mortgage payments will fluctuate in accordance with those decisions. A rise in interest rates leads to higher mortgage rates, which in turn means larger mortgage payments for borrowers. Conversely, a fall in interest rates leads to lower mortgage rates with smaller payments.

Interest rates versus home prices

The US mortgage interest rates are increasing faster than ever before, which is causing a change in home prices. Interest rates were low at the start of the pandemic. However, they have risen more than one percentage point in the past year and will continue to rise.

Similar to the pandemic, home prices were lower when it began. However, the median national home sale price has risen to $390,000. However, house prices have slowed in their upward trend.

You can see that interest rates have an effect on home prices. They determine how much people have to borrow to purchase homes. The interest rate affects the price of homes, as the demand for housing increases or decreases depending on how high it is. A lower interest rate is generally more appealing to buyers than a higher one. This dynamic changed during the pandemic because of the sudden rise in interest rates and a major dip in them. Let’s now see what this means to the real estate market.

will mortgage rates rise

What happens if mortgage rates rise?

As the economy grows, the interest rates tend to rise. An increase in the interest rate will cause mortgage rates to rise. Normal circumstances would see a drop in home prices due to rising mortgage interest rates. Rising interest rates on mortgages lead to higher mortgage payments, which can be a deterrent for buyers. This means that the demand for homes will decrease and sellers won’t be able sell their houses as quickly. Sellers will have to lower their home prices. As buyers slow down, rising interest rates could cause a drop in house prices.

Take, for example…

A buyer would need to pay $1,900 per month for a $400,000 home loan. This is assuming a 30-year mortgage at a 4% interest rate. If the interest rate rises by 1%, this results in a $238 increase for a home buyer’s monthly payment. This represents a jump of $1,900 to $2,138.

This means that the market is changing because buyers are able to afford less when buying houses. Sellers who struggle to sell their homes reduce their prices. This makes the market a buyers’ market as the housing supply exceeds demand.

Are mortgage rates expected to rise in 2022?

The mortgage interest rates have been on an upward trend since the beginning of 2022, following the record-breaking plunge that saw mortgage rates drop to below 3% at the start of the pandemic. Many real estate professionals believe the days of sub-3% mortgage rates are gone to never return. The average interest rate for a 30-year loan will be between 5.5% to 6% by the end of 2022.

Is buying a house when interest rates are high better?

Since the pandemic, the monthly mortgage payment amount that American home buyers have to make has increased significantly. Low interest rates caused a spike in home prices. As the interest rate rises, house price growth has slowed down. Many people are questioning whether they should buy a house in this economic climate.

Each person’s situation will determine the decision. Some people are compelled to buy a home right away, while others can rent until interest rates drop and house prices fall.

Real estate investors can find it difficult to decide whether to purchase property at high interest rates. What happens to real property during inflation? As property values rise, real estate can be used as a hedge against rising inflation. It also provides positive returns over the long-term. As house prices are likely to continue rising at a slower pace, real estate investors and sellers of properties might want to sell earlier than usual. But, buyers of properties might prefer to wait until prices fall a bit or risk paying more for an investment property.

interest rates affect home prices

How do interest rates affect rental prices?

As higher mortgage rates lead to lower buying demand, which in turn causes the house price to fall when interest rates rise. This means that the market value for houses drops as interest rates rise.

It can be different when it comes to renting. Rental prices are set and maintained by agencies or landlords, so they are not necessarily related to the interest rates. Landlords will be affected by the fact that rental property prices will fall along with other house values. This can sometimes lead landlords to raise rental prices due to the fact that they pay more monthly mortgage repayments.

The high interest rates that drive up house prices and make affordable housing difficult to find are two major reasons why rent prices will continue to rise in 2022.

Inflation can cause rental prices to rise or fall. This is because the cost of living increases or falls. It can be cheaper to rent than to purchase a property during high interest rates. However, this is dependent on the individual.

Will interest rates continue to rise and house prices drop?

The trend towards higher house prices has been notable and will continue further into 2022, despite rising interest rates. Although no drop in house prices is expected this year, the supply is still tight and the pace of growth will not be as fast. According to Doug Duncan (senior vice president and chief economist at Fannie Mae), house prices will rise by 7.5% in this year’s comparison to last year’s staggering 18% increase.

The bottom line

This year will be more stable for home buyers and real estate investors. While the major increase is slowing, house prices are not falling. While the future is uncertain with continuous economic changes, it is important to understand how interest rates affect home prices for anyone who is interested in investing in real estate or buying their first home.