THE IMPACT OF INTEREST RATE INCREASES ON THE REAL ESTATE MARKET
Wednesday, July 19, 2023
Interest rates play a crucial role in shaping the dynamics of the real estate market. When interest rates fluctuate, it can have significant implications for both buyers and sellers. In this blog, we will explore the effects of interest rate increases on the real estate market, focusing on its impact on inventory and the behavior of buyers.
Interest Rates and Inventory: As interest rates rise, the cost of borrowing increases for potential homebuyers. The rise in borrowing costs can lead to a decline in demand for homes, as higher mortgage rates can make purchasing a property less affordable. Consequently, this reduced demand can translate into a decrease in home sales.
Impact on Inventory: The relationship between interest rates and inventory is complex. In the short term, an interest rate hike may lead to a drop in inventory, as some sellers may choose to hold onto their properties in the hope of achieving better prices in the future. This decreased supply of homes can create a competitive market for buyers, potentially driving up property prices. Of course, one should also consider the impact on investors of interest rate increases. If the rates go up, investors may not be getting enough income from rent to cover their mortgage payments. This will ultimately affect their decision to keep the property versus selling it on the market to keep from losing money. Should this be the case, in the long-run, the inventory of homes available will also increase.
Buyer Behavior in a Rising Interest Rate Environment: In a rising interest rate environment, buyers tend to exhibit certain behaviors as they navigate the real estate market:
Rush to Buy: Some buyers may feel a sense of urgency to purchase a property before interest rates increase further. This behavior can lead to a surge in demand in the short term, causing bidding wars and a potential spike in property prices.
Affordability Concerns: Higher interest rates can impact buyers' purchasing power, making it more challenging for them to afford their desired homes. Buyers might need to adjust their expectations or look for more affordable options.
Shift to Renting: In response to rising interest rates and increasing home prices, some potential buyers might choose to delay their home purchase plans and continue renting until the market stabilizes or until they can secure a better mortgage rate. Should they decide to do this, this behaviour of turning to rentals can increase demand for rental properties thus causing the market rents to go up.
Refinancing Activity: As interest rates rise, existing homeowners might be discouraged from selling their homes due to higher borrowing costs for their next purchase. Instead, they may opt to refinance their current mortgages to take advantage of lower rates, further reducing the available inventory.
Market Stabilization: While interest rate increases can initially cause fluctuations and uncertainty in the real estate market, they can also contribute to market stabilization. As demand cools down and prices moderate, the market can reach a more balanced state, with inventory levels leveling out, and more realistic and sustainable price expectations.
Interest rate increases have a profound impact on the real estate market, affecting both inventory levels and buyer behavior. Higher interest rates can lead to reduced demand, decreased home sales, and a potential drop in inventory as some sellers choose to wait for better market conditions. For buyers, rising interest rates can create affordability challenges and influence their decision-making process. As a real estate professional, it's essential to stay informed about interest rate trends and educate our clients about their potential impact on the housing market, empowering them to make informed decisions.