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What To Know About A Rising Rate Environment

Carey Chesney3-minute read
December 03, 2021

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2021 was a banner year for interest rates, with the average interest on a 30-year fixed-rate loan getting all the way down to 2.74% in January. This meant that borrowers who would otherwise not afford a new home could call their real estate agent and go house hunting. Potential home buyers who already could afford a house could all of a sudden afford a bigger one. This was a win for real estate professionals, as more buyers looking meant more clients for agents to serve.

As with most things, water tends to find its level, as they say. Interest rates are no different, and the eventual rise when they get so low appears to be right around the corner. In fact, the Mortgage Bankers Association is forecasting rates to be at 4% by the end of 2022. This article will discuss how higher rates impact the real estate industry and detail some tips you can share with your clients in a higher rate environment.

Will Rates Go Up In 2022?

The short answer is, they probably will. Mortgage rates shot back up recently, with the average 30-year fixed-rate loan going from 2.98% to 3.10%. Fifteen-year fixed rates went up as well, going from 2.27% to 2.39%. Here’s a look at the month-by-month comparison for all of 2021 so far.

 

Month

Average 30-Year Fixed Rate

January 2021

2.74%

February 2021

2.81%

March 2021

3.08%

April 2021

3.06%

May 2021

2.96%

June 2021

2.98%

July 2021

2.87%

August 2021

2.84%

September 2021

2.90%

October 2021

3.07%

Source: Freddie Mac

The recent trend over the last few months indicates that rates will rise in 2022, which impacts the lives of real estate agents in a very real way.

How Do Higher Mortgage Rates Impact The Real Estate Industry?

Interest rates and the ability to buy homes are very closely related. When rates go up, home buyers have less ability to purchase homes. When rates decrease, the purchasing power for home buyers increases.

If interest rates rise 1% and all other economic factors remain the same, purchasing power for homebuyers will decrease by just over 11%. Therefore, every quarter-percent (.25%) rise of interest rates reduces homebuyer purchasing power by about 3%.

That means for a home purchase of $300,000, a 1% interest rate rise reduces buying power to just under $267,000. So, someone who potentially may have been able to purchase your listing may no longer have the buying power to do so. This creates a smaller buyer pool and less demand for your listing. It’s also likely to increase supply as fewer people can purchase homes.

If mortgage rates rise, it becomes more probable for indecisive buyers to rush into the market with the fear of rates rising even more, so in the short term, we will likely see a decent boost in potential buyers. However, it could add extra pressure if rates continue to rise without leveling out.

Do Higher Rates Mean Lower House Prices?

As most agents know, supply and demand play crucial roles in determining the movement of home prices. If supply goes up, home prices go down. If supply goes down, home prices will usually go up. Since home prices go up in tandem with buyer demand if high-interest rates temper that demand, then home prices will go down.

After all, the fewer people you have interested in your listing, the less likely you are to get top dollar for it. When talking to your listing clients about putting their homes on the market, these are essential factors to consider.

2021 has been a seller’s market – one where demand is high, inventory is low, and home prices are up – by any measure. If interest rates rise, the market could become more balanced. The conversation you should have with sellers should be framed as taking advantage of the strong seller’s market 2021 has presented before it’s too late.

The conversation with your buyer clients should revolve around taking advantage of low rates before it’s too late. If they wait to buy, they may be paying more to borrow money with higher interest rates which means looking at homes at a lower price point.

Rising Rates Are Still Historically Low

The good news is that interest rates are still historically low and affordable. Buyers and sellers don’t need to try and time the market by predicting when the best time to sell or buy will be. Instead, buyers should take advantage of low-interest rates to buy, and sellers should take advantage of that increased buyer demand to sell. The most critical thing you can tell your clients is that there is no way to predict the future for certain, so buying or selling when rates are low is always a good idea. 

Conclusion

Encourage your sellers to sell when they are ready and not to try and time the market. If they are ready to move, the time to sell is now.

Tell your buyers to keep an eye on rates, but if they are ready to buy now it’s a great time with rates near historic lowa. Use Rocket ProSM Insight for access to your client’s mortgage process throughout the home buying process.

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    Carey Chesney

    Carey Chesney brings a wealth of residential and commercial real estate experience to readers as a Realtor® and as a former Marketing Executive in the fields of Health Care, Finance and Wellness. Carey is based in Ann Arbor and attended the University of Wisconsin-Madison, where he majored in English, and Eastern Michigan University, where he recieved his Masters in Integrated Marketing & Communications.