Will rising interest rates finally cool the booming real estate market?

Most everyone knows that the Fed raised interest rates by half a point in early May, but what does that really mean? Essentially, the Fed has planned to raise rates to deal with record high inflation, which means it hopes to stem the price hike we’re seeing on almost everything we buy today, from commodities from groceries to household supplies.

Rising interest rates also mean you could get a higher return on your savings, whether you do business with a traditional institution or park your savings in an online bank.

Unfortunately, there’s another side to rising rates: borrowing money is going to get a lot more expensive than it has been in previous years.

Higher interest rates and housing

Rising rates will have the most profound effects on purchases that require large loans, such as homes and cars. With the housing market in particular, the effect of rates can easily add up to tens of thousands of dollars (or hundreds of thousands of dollars) in additional interest charges over the average term of an average mortgage. .

Consider this example:

Imagine borrowing $300,000 for a house using a 30-year mortgage with an interest rate of 4%. If you made the minimum payment of $1,432 (principal and interest) on your loan all the time, you would end up paying $215,608.52 in interest over 360 months.

If you increase that rate to 4.5%, on the other hand, the monthly payment jumps to $1,520, or almost $90 more per month. Worse still, the total interest expense over 30 years is $247,220.13. This represents over $30,000 in additional interest charges over the life of the mortgage note.

And 4.5% is being generous. We see rates approaching 6% for 30-year fixed rate mortgages. A $300,000 loan at 6% will result in a monthly payment of $2,062, more than $500 more per month than a loan at 4%.

Will rising rates slow the boiling housing market?

Obviously, the impacts only increase from there if rates go up or if you borrow more than $300,000. With that in mind, it’s a good idea to ask whether rising rates can take the boiling real estate market down a few notches, either by lowering the average price paid for homes or by slowing the average time it takes to make a sale.

Experts say rising rates will certainly have an impact on the housing market, although the extent of that impact and when it will be felt the most is uncertain.

Some buyers will be overpriced

Real Estate Broker Jessica Peters of Douglas Elliman points out that in addition to paying more interest, rising mortgage rates can also reduce the mortgage amount that borrowers can qualify for.

“When it comes to buying property, every 1% increase in interest rates on a buyer’s loan reduces their buying power by about 12%,” she says. “In other words, if buyers don’t have significant savings or an income that is beyond what was originally allocated, the overall budget for buying a home should drop significantly.”

Fewer bidding wars

According to Daryl Fairweather, the chief economist of RedFin, most homebuyers are still facing bidding wars, but the competition is starting to cool off as borrowers reassess their goals. Fairweather expects the bidding wars to cool significantly as rising mortgage rates deprive more buyers of the homes they want.

“This should provide some relief to people who can still afford to buy, as they will likely face fewer competing offers and may no longer need to offer significantly more than the asking price to win,” says- she. “Unfortunately, the slowing competition will not help those who have already lost their property and are now struggling with soaring rents.”

Rental rates may increase

Dennis Shea, who works as executive director of the Terwilliger Center for Housing Policy at the Bipartisan Policy Center, says he definitely expects the scorching housing market to cool down in the coming months.

However, with rising mortgage rates, the cost of home ownership will continue to rise even if there is a decline in home values. Unfortunately, this will only create more housing problems for tenants.

“As home ownership becomes out of reach for more and more families, we can expect rental demand to increase and rents to continue to rise,” he says.

More rate increases may be on the way

According to Robert Heck, who is vice president of mortgages in the digital mortgage market Mortywhere things head from here may come down to inflation and whether or not the market settles at these rate levels.

If inflation spirals out of control and the Fed takes even more aggressive action, he says, rates could reach a level where they could send demand and affordability into a steep downward spiral.

That said, Heck notes that current market indicators do not expect interest rate levels over the next ten years to reach a level that would push benchmark mortgage rates above 7%. So now might be a good time to buy again.

“Affordability has certainly taken a hit as prices and rates have risen, but there are still opportunities in the market for those who are ready to buy, and current rate levels do not automatically mean that you should walk away from the market completely.”

There is always a supply shortage

In the face of rising rates, it’s important to remember that there’s always a shortage of supply – there just aren’t many homes for sale. And given that most homeowners today have locked in their own mortgages at 4% APR or less, it could be difficult for them to put their house up for sale to move.

As such, there may not be increased inventory in the market to help drive prices down.

Ready to buy? Consider these strategies

If you’re hoping to enter the housing market before rates rise further or rental prices rise more than they already have, there are some strategies that can help you get a mortgage. Ian Katz, a licensed associate real estate broker with Compass in New York says your first course of action should be to cut the budget a bit and look for properties that offer a bit more value or a discount opportunity.

For example, properties that are 10% below a buyer’s maximum price budget “would allow for a lower purchase price and lower loan amount to compensate for the rate increase,” he says. “If a buyer is comfortable buying a home that needs a little more aesthetic attention or has some other manageable trade-off, then monthly payments can stay similar through a cheaper purchase and less debt. .”

The second strategy recommended by Katz is to look at creative financing options or consider an AR 7/1, 10/1, 7/6 or 10/6

AR
M Mortgage. This move can save you 0.375% to 0.5% compared to a 30-year fixed rate.

That said, Katz cautions that a buyer going this route should proceed with caution and confidence that they can either fully pay off their mortgage or trade within the fixed rate period, so as not to be affected by the adjustable reset later. in the loan.

“Although the floating period rate has a ceiling, this rate will remain relatively high,” he said.

Finally, CEO Nik Shah of Home.LLC. says a quick way to lower the cost of your mortgage is to put down a large down payment. Not only will you borrow less this way and pay less interest overall, but lenders may also offer you a lower rate.

If you put 20% or more down, you can also eliminate fees like private mortgage insurance (PMI) and monthly mortgage insurance premiums, Shah says.

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