How Rising Mortgage Interest Rates Affect the Real Estate Market

Rising mortgage interest rates affect the real estate market in many ways. Both buyers and sellers will usually benefit from lower interest rates, and higher interest rates will usually only be beneficial to banks and other lending institutions. The fluidity of the real estate market is greatly increased during times of low interest, and thus low interest rates represent the best opportunities overall. However, that is not to say that an intelligent real estate agent cannot capitalize on times of high interest. Buyers may feel pressure to purchase before interest rates increase further, and sellers may want to sell before buyers are priced out of the market.


Buyers Feel They Can Afford Less

As mortgage interest rates increase, the amount of home a buyer can afford decreases. This change is often substantial; a single percentage point increase in a mortgage interest rate can lead to a buyer losing tens of thousands of dollars towards their potential home. Ultimately, sellers will see this mortgage interest rate cutting into their own profits, as they will need to lower the price on their homes to sell them at all. Buyers will need to be encouraged to act quickly to secure their homes.


Buyers are Less Motivated Overall

When mortgage interest rates are low, many buyers are pushed into the market out of a desire to get a good deal. Some buyers may purchase homes before they intended to simply to secure a good rate, while other buyers may find previously unaffordable homes suddenly attainable. When mortgage interest rates are high, this sense of urgency dissipates and the market as a whole stagnates. Real estate professionals may need to get creative when working with these less motivated buyers.


Property Values Slide Downwards

Unmotivated and unqualified buyers ultimately lead to property values going down. Even in remarkably stable markets, you will usually find that the volume of sales will decrease even if the value isn’t substantially altered. Unfortunately, this in itself drives the property values down even further as buyers will avoid purchasing homes when they feel the market is faltering. This will lead to a weak market with less activity, but could also lead to lower mortgage interest rates as banks attempt to encourage buyers to purchase again.

To avoid both stagnation and volatility, the real estate market needs to maintain a certain financial equilibrium. Property value cannot go up or down too fast, and mortgage interest rates can neither rise nor fall dramatically; when either of these factors change suddenly, real estate agents need to act fast and remain in control.…