Interest rates are on the rise and it seems to have turned the market. What was the hottest real estate market in memory, where sellers were getting 100k above asking price for certain properties, has now shown signs of cooling, all because of interest rates going up?
People are concerned and not sure what to expect from the market as we head into this correction or potential recession. The interest rates have certainly slowed things down but there’s a reason the market hasn’t stopped.
Why Are Interest Rates Going Up?
The increase in rates was done because the cost of living, especially rent and buying a property were getting too expensive. If the cost of living is beyond the median income rate, that leads to an increase in debt which will eventually mean more than half of the country is under the poverty line.
Now that you know why rates are increased, the important thing to understand is that it’s not necessarily a bad thing, depending on your situation. If you already own a home and want to sell, look into what you can get and if you are willing to rent for a year or two to see if the market resets. If you want to wait it out, you could benefit from building more equity at a cheaper interest rate and then being able to sell for a higher profit the next time prices are much higher.
Why Would That Bother Buyers?
Home buyers would be concerned about increased interest rates because borrowing at a higher rate can increase the overall cost of the loan by tens of thousands and your month payments by hundreds of dollars a month. Increasing rates is designed to cool off buyer interest and therefore lower the value of a property or commodity.
The same concept applies to the groceries we buy or the gas we put into our cars. Increasing rates will slow things down but that means it’s not the best time to be a buyer. That’s why many are concerned that buyers are not going to remain interested, even as inventory increases.
Why Are Some Buyers Not Concerned?
Buyers are getting smarter. They understand the market and they especially understand that buying now is still a good option for them. If they were to buy now, even at a higher rate, their monthly mortgage payments would still be similar to that of their monthly rent payments. Because rent is at record highs as well, buying at higher rates doesn’t bother potential buyers as much as one would think.
Understanding the market is key. More people have over half their mortgage total paid off, meaning if they were to sell even at the same purchase price, they would walk away with plenty of money to cover living expenses for a while. Buyers are also looking for deals and even a small dip in the market may motivate them to move quickly. This is why it’s important to work with a realtor and understand your market. When in doubt, building equity in your home is always the smart thing to do as long as you are not increasing your debt. The reason is because even in a down market, you are saving on the extra equity you are building and raising your eventual value.