Navigating Mortgage Rates

For the first time in years, sellers and buyers of real estate are faced with rising mortgage rates. Unless we’re talking about all-cash transactions, this has complicated matters for both parties, and they could use a little professional guidance. 

That’s where you come in, right? 

Well, to do your job effectively, you'll need to understand a few things about the current environment and be able to explain how high interest rates affect the housing market. 

High Interest Rates: What Are They and Who’s Responsible? 

Interest rates are the price homebuyers pay for the privilege of borrowing money. 

The specific interest rate that an individual borrower pays for a loan is influenced by a combination of factors: their unique financial profile, the down payment and collateral used to secure the loan, and the broader economic climate of the country they live in. 

That’s right. A borrower is only partially responsible for the mortgage rate a lender will offer them. And in the U.S., the Federal Reserve is the primary “outside” influence affecting mortgage rates.  

The Effect of Inflation 

In times of troublesome inflation (some inflation is considered acceptable, if not desirable), the Fed will take steps to cool down the economy. They do this by increasing the cost of borrowing money, which typically reduces the demand for loans of all kinds — including mortgage loans. 

To counter the inflation we are presently seeing, the Fed has already implemented the first of several planned interest rate hikes. 

Consequently, in the first part of 2022, mortgage rates jumped from just above 3 percent in January to over 5 percent in April. A move like that can easily raise a borrower’s monthly mortgage payment on a $500,000 home by $500 or more. 

Rising Rates, Falling Prices?

Traditionally, this rise in mortgage rates would result in a significant decrease in housing demand and lower home prices. 

But in a post-pandemic world where a tight labor market exists and supply-chain issues linger, the impact has been more subtle. Builders have been stymied, and homeowners are staying in their houses longer. So, for now, demand still exceeds supply in both the resale and new housing markets. 

Even while some slowing can be detected, homes continue to sell within a week of being listed. A softening of price is more commonplace, but it’s relatively moderate and often a function of sellers backing off the aggressive overpricing that was routine for the past year or so. 

Where Do We Go from Here?

Some economists expect home prices to continue their upward climb through the year, a few even forecasting double-digit growth. 

Others see the increase in interest rates as reducing affordability, leading to fewer buyers, and ultimately relieving the upward pressure on home prices we’ve become accustomed to.  

Homebuilder data points to a continuing demand for new homes. The backlog of houses under construction and those permitted but not started point to a busy rest of the year for builders. 

Although no one can predict with complete certainty, it appears that the housing market will remain a seller’s market but moderately so. Prices may not drop so much as slow down their rate of ascent. Supply and demand will come closer to equilibrium as builders' supply issues fade and the construction backlog is addressed. 

How Do Higher Interest Rates Impact My Clients?

Higher interest rates make homes more expensive to buy, which reduces demand. This hurts buyers. Reduced demand generally leads to price reduction, which hurts sellers. In other words, both parties are negatively affected by higher interest rates… there are no winners (unless you count the lenders).  

While homebuyers can expect less competition for properties in a high-interest rate environment, those same rates will reduce their purchasing power, requiring homebuyers to dial down the loan size they seek. 

And homeowners looking to upsize may have second thoughts once they contemplate swapping out their current low-rate mortgage for a more expensive loan on the new home they were thinking about buying. 

High Interest Rates: Advice for Real Estate Agents

So, back to the original question: What can you do to help clients navigate through the current lending environment?  

Here are a few suggestions: 

For the Seller

Help the seller understand that days on the market will creep up a bit. While they might not witness a bidding war on their home, they will still likely get something very close to their asking price. And inspections and concessions, which fell by the wayside during the frenzy of recent years, might once again re-enter the market. Nevertheless, only reasonable requests should be considered. 

The days of the flash sale are over, but the quick sale is still very much a possibility. 

For the Buyer

Buyers can breathe a sigh of relief, knowing that the pressure to make sight-unseen purchases and offers of tens of thousands of dollars over asking price have largely disappeared. And while buyer inspections and concessions are no longer out of the question, they should be limited and reasonable. 

So, let the buyer know that they have a little more time to think things over… to make a good decision. 

And if a buyer finds that current interest rates have nudged their dream home a tad out of reach, they might want to take a timeout and: 

  • Save up for a larger down payment 

  • Pay off debt and do other things to improve their credit profile 

  • Let the housing market come to them (if a greater slow down appears imminent) 

It’s true that this last piece of advice doesn’t lead to an immediate commission for you, but there is hardly a better way to show that you’re putting the buyer-client’s interests first. And who knows? Maybe they will decide to press forward with their home search anyway, with you having cemented your relationship with them as their trusted guide in this journey. 

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Michael Rhoda

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