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Rising Interest Rates, What Does This Mean for the Buyer and for the Seller?

07/18/22  |  Jenna Leggette

Here’s what you need to know about the current state of the market.

From the gas pump to the grocery store, inflation is driving up prices nationwide. In March, inflation reached a 41-year high of 8.5%, and though there are signs it may taper off, peoples’ wallets are still feeling the effects. Across the country, many people feel the need to tighten their belts or hold off on making major purchases. To combat this record inflation and decrease some of the financial strains Americans are feeling, the Fed raised interest rates a half a point in May.

While rising interest rates mean people can earn higher returns on their savings at both traditional and online banks, the downside is that it will greatly impact purchases that necessitate large loan amounts, such as cars and houses. In short, increasing interest rates can add additional interest throughout the lifetime of a mortgage. Experts agree these rising rates will have a direct impact on the real estate market in particular, although it’s unclear exactly what the impact might look like and how long it may take for the full effect to be felt. As with any situation, buyers and sellers have benefits and drawbacks. So let’s look at what rising interest rates could mean for people in both camps.

How rising interest rates impact buyers

The U.S. real estate market has been red-hot recently, with homes regularly selling for significantly over the asking price amidst all-out bidding wars. Due to low inventory and motivated buyers willing to quickly snap up homes above asking prices, houses have been moving off the market very quickly. But because interest rates are now rising (which can mean you have to pay more money throughout your home loan lifetime), many buyers may be thinking about hitting a pause on the purchasing process.  The average monthly mortgage payment for a home buyer had jumped up 39% year-over-year compared with April 2021, with the average 30-year fixed-rate loan at a 12-year high of 5.1%. That steep increase is enough to make anyone think twice about purchasing a home, especially when interest rates were much lower not that long ago.

Besides paying more in interest, increasing mortgage rates can make it more difficult for people to get approved for the loan amount they want, which might price some buyers out of the market. For example, experts say that one percent of the interest rate increase on a homebuyer’s loan decreases their purchasing power by around 12%. If buyers do not have a large enough down payment or a high enough income to make the difference, they will qualify for far less than they were initially expecting. As a result, rental demand may begin to increase, which might jack up rental prices.

There are still some positives to be found in the situation, though. Buyers who can still afford to purchase a property may find they have to deal with fewer competing offers and may even be able to buy a new house for less because of fewer competing bids. It might still be a good time for highly motivated buyers to enter the market. It also means you may have more time to decide which neighborhood and house you want to buy instead of immediately jumping on the first option since bidding wars may be fewer.

To make it easier to find a house, buyers might want to start looking at listings significantly under their maximum budget. This would allow them to get a smaller loan, saving money on the interest rate. Of course, looking at houses under your price range might mean they are outdated or lack some of the amenities you want.  Would-be buyers should consider the pros and cons of buying a property that may not meet all their needs and spend some time thinking about what matters most.

Buyers may also be able to reduce their mortgage rate by forking over a sizeable down payment. If you put down at least 20%, you won’t need to pay private mortgage insurance and monthly mortgage premiums, which can result in additional long-term savings. And don’t forget to think through the benefits of fixed-rate versus adjustable-rate mortgages. With interest rates on the rise, it’s tempting to opt for a fixed rate, but that may ultimately cost you more in the long run if rates go back down. There’s no concrete answer for which is right for you, but it’s important to weigh the pros and cons to make an informed decision.

How rising rates impact sellers

While it may seem like buyers would be more impacted by rising rates, it can also affect sellers. First of all, higher interest rates may mean fewer buyers, which means you may not have as many options (or as high of offers) to choose from. In turn, you may have to lower your asking price (or accept one that isn’t as much as you initially hoped).

“There is a consistent correlation between interest rates and home prices,” says Ward Morrison, president and CEO of Motto Franchising, LLC. “When interest rates increase, affordability of homebuying decreases, causing an inverse reaction to home valuation. To offset this issue, the market stabilizes, and home prices go down. Luckily for buyers, because real estate supply and demand is so off balance right now, we likely won’t see prices decrease as rapidly as we have in the past.”

This means the market may also shift toward the buyer’s favor, with fewer buyers willing to waive contingencies or forgo an inspection. But even though there can be some challenges, it doesn’t necessarily mean you should pull your home from the market. There will always be motivated buyers in any market, and as long as you price your home competitively, you can still pull in reasonable offers.

To simplify the process, work with a trusted agent who can help you determine how to price your home accurately. Another benefit of working with a real estate agent is they can help advertise the home and connect you with a wider network of buyers who might be interested in your property.

A word to the wise: If you’re preparing to sell your home, it’s important to make sure buyers have been preapproved for a mortgage based on current interest rates. Loans that were preapproved at lower rates in the past may not still qualify. This ensures that you are accepting offers from people who have the financial ability in today’s market to finalize the deal.

Buying or selling Media, PA real estate?

If you’re looking to sell your home, Jenna Leggette is on hand to answer any questions you may have and help you determine the best time to list your house (and the right price to list it at). On the flip side, if you’re looking for houses for sale in Media, PA, she can guide you through all the ins and outs of the process and ensure you put in the most competitive offer possible.

Jenna Leggette knows how confusing it can be to navigate the buying and selling process on your own, which is why she is committed to providing state-of-the-art service for you and your family. Rising interest rates can be daunting to navigate and cast uncertainty on both sides of the real estate market. But it doesn’t have to be a deterrent for buyers or sellers, and Jenna can help you figure out how to make the most of the situation and walk away with solutions that work best for your needs. Contact Jenna Leggette Group today.