By now you probably have heard that interest rates have risen to a 20-year high, but how exactly is this affecting Real Estate sales and prices? The Federal Reserve (the Fed) raises interest rates to slow demand for goods and services as with higher interest rates things cost more over time. The Federal Reserve does not directly affect mortgage rates as the rates the Fed control are only the rates that banks borrow from the Fed. This makes the cost of money to banks cost more so Banks raise their rates to the consumer to cover the increased costs to them. Since consumers get loans from Banks to buy cars, homes, consumer goods, and services the costs for all of it go up. In the mortgage arena, we have seen rates go from the low 3’s in January of 2022 to the low 7’s currently.
It should be obvious that a consumer will be able to buy less of a home in a high-interest rate environment, but home buyers don’t really understand how much it actually affects their buying power. An example would be a couple who has been making an income of $100,000 combined with a normal debt load of a car payment of $500 a month and student loans of $250 a month. This couple could afford a house with a 3% mortgage rate and 5% down at $561,000 sale price. At a 7% interest rate the same couple can now only afford a house priced at $356,000. This a $205,000 difference that has occurred in less than a year. This will hold true when qualifying for auto payments, business loans, and all loans to buy goods and services.
So with the diminished buying power of potential home buyers, you would think that Real Estate values will go down to accommodate the higher interest rates. You would be right in your assumption. This holds especially true in the higher priced homes where the people that were qualifying for a million-dollar mortgage can now only qualify for a $700,000 mortgage. Home sellers are having to come to grips with the fact that their home is not sellable at the same price it would have been a year ago. With older folks looking to retire in the next 5-10 years they are seeing the value of their Real Estate portfolio go down, and this may hold off their plans for retirement and holding on to their long-term jobs not making room for younger folks to fill the gap. Furthermore, the older generation has seen this before so they will be extra cautious with their money going into retirement and possibly not selling their family home to downsize for retirement as they may have originally planned.
The higher interest rates are pushing Real Estate values lower and this is making investors worried to the point they are holding back investing in Real Estate taking out a whole segment of Real Estate Buyers. As prices decrease you will be seeing appraisals come in lower-than-expected making selling a house more challenging when the sale depends on an appraisal. Those particular sales may fall through if sellers are not willing to lower their prices and eventually, if they need to sell, they will have to sell at a lower price. If interest rates continue to go up, and it is looking like this will be the trend, prices will have to continue to go down to accommodate those that can no longer afford to buy in the same price range as the lower interest rates would have allowed them to. The higher rates thin out the potential pool of home buyers as their buying power has diminished and those folks looking to move up by selling their existing home and buying a bigger one have dried up as well.
From a lending aspect, as rates rise, lenders know that the home values will be decreasing so the appraisal is going to be a much more important part of the transaction. FNMA and FHLMC will be cracking down in different markets where they know the prices are softening faster than other parts of the country, typically in higher-cost areas like California. Since MAE Capital Mortgage also does Private Money lending, we are seeing private individual investors who actually lend their own money to others, tighten up their requirements as well. This means less available funding for fix and flip programs, After Repair Value (ARV) programs, investor buy and hold programs, commercial funding, and more. Talking about commercial funding where that market has been killed essentially by COVID and Amazon coming in to fill the gap, has gotten even worse. As investors see the rates go up, they are less likely to buy or lend their money for Real Estate of any kind.
To conclude, higher interest rates make it more difficult for home buyers to buy homes that fit their needs. High-interest rates make home values have to come down to be able to sell their homes. Higher interest rates make the desire to invest in Real Estate and Real Estate Notes and Deeds a whole lot less. Higher interest rates make commercial lending even worse and make commercial values continue to decline. So, all in all. higher interest rates are not good for Real Estate values, resales, investments, and rehabilitation of real estate. If you are a potential buyer of Real Estate, you need to make sure your offer is a bit lower than the current market supports as prices will continue to fall as rates rise. If you are a potential seller of Real Estate, do it now before rates go even higher and be flexible in looking at lower offers, if you are not flexible you will not be able to sell your property in this crazy Real Estate market. On the bright side if you are well qualified first-time home buyer it should not matter to you what rates are so long as you can afford the payment associated with the house you want to buy. As a first-time homebuyer, you now have more inventory to choose from and if you buy now and interest rates continue to go up you have a low mortgage and an affordable payment, when interest rates go down in the future you can always refinance to the lower rate. So don't be afraid of rising interest rates as there is no perfect time to buy real estate but what I have seen over the long run owning is far better than renting so do it now and join the club of home ownership and let MAE Capital help you with buying your home and financing it as when you bundle with us you get perks like money for closing costs and an easier experience.