Mortgage interest rates have experienced the fastest increase since the 1980s. The U.S. weekly average 30-year fixed-rate mortgage reached 6.94% on October 20, 2022, up 3.85 percentage points from a year ago. The rates are expected to remain high, averaging 6.8% in Q4 2022 and 6.2% in Q4 2023.
The housing market decelerated as it responded to the higher mortgage rates, and the reduced number of mortgage applications reflected an ongoing contraction of home sales activities — in line with other periods when the market experienced interest rate increases.
What do all these mean for homebuyers, and how can real estate agents help their clients navigate uncertain times? Here’s what you need to know.
The Impact of Rising Mortgage Rates on the Housing Market
The Federal Reserve raised the interest rates several times in 2022 to combat inflation. The higher interest rates increased mortgage loan costs, making properties more expensive for buyers and reducing the demand for home purchases.
However, we must consider the increased borrowing costs within the context of the larger picture. If the economic growth and wages keep up with the rising interest rates, the increase won’t have a devastating impact on property value.
How Rising Mortgage Rates Affect Homebuyers
Consumers are wary of rising costs. Here’s how you can help your clients understand what rising mortgage rates mean for homebuyers:
Lower Loan Amount
Home loan pre-approval is a function of the down payment and the monthly payment a buyer can afford, calculated using their debt-to-income (DTI) ratio. Higher rates mean more money must go into paying the interest each month, which translates into a lower loan amount.
The equation is often even less favorable for first-time homebuyers who don’t have money from the sale of a home to afford a higher down payment. Many homebuyers may have to lower the price range for their search.
Pent-up Demand
When rates rise and demand decreases, sellers may eventually lower their prices. However, the shift is unlikely to happen immediately, as there isn’t enough inventory in the housing market to meet the pent-up demand, which could sustain a higher price for a while.
Higher Mortgage Payment
High rates mean more of the monthly payment will go toward paying the interest and higher mortgage payment each month. Homebuyers should prepare to spend a larger portion of their budget on housing when making their decisions.
Buying vs. Renting
It may be tempting to continue to rent while the mortgage rates are high. However, the rapid increase in property values means the cost of rent often rises faster than mortgage payments. Each market is different, so homebuyers should research their areas and weigh their options.
The higher rates and tighter lending standards also mean fewer people can afford a mortgage. They need to continue to rent, creating a favorable environment for buyers of investment properties.
The Bottom Line
Despite the increase, interest rates are still near historic lows, which bodes well for buyers. In fact, today’s market has some of the cheapest debt homebuyers can attain. Besides alleviating clients’ concerns and educating them about the implications, you should help them find the best local loan originator or bank to get the best rates for their unique circumstances.
