Rising Interest Rates May Be the Key to a Healthier Housing Market

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What will the future hold when it comes to mortgage rates and the housing market? Current talks from the Federal Reserve (Fed) signal that rates will continue to rise over the next several years. What does this mean for the housing market, new home buyers, home sellers and the real estate agents involved? Let’s look at what’s happening now.


How We Got Here

Those who were in the real estate business in 2007, when the housing crisis was unfolding, may still be reeling from the sobering experience. As the market is now in recovery and the interest rates are rising, many are apprehensive as to how a previously volatile market will react.

In response to the events in the housing market that year, the Federal Reserve lowered interest rates to help speed economic recovery. During a time when so few could qualify for loans, this lowered rate allowed home buyers who had 20% savings to put down to have a lower monthly payment. According to the Federal Housing Finance Agency, after a continued rate drop from mid-2007 through 2011, we saw the average housing price rise by about 4-6% a year, from 2012-2016.

According to The Economist, however, the prices remain 20% below the 2006 peak just before the “housing collapse.” The peak is commonly referred to as the “housing bubble” because after it “burst,” prices fell dramatically. We can, therefore, consider the fact that we are 20% below the peak to be good news as we look toward the future. It indicates that we have not simply escaped one housing bubble to enter another.

What Experts Are Saying

Although there is some speculation that, due to other market factors, the rates may actually move lower before they climb. Most analysts are considering the impacts of rising rates now as they forecast the future.

Zillow and Pulsenomics, a real estate research and economic research firm respectively, surveyed 100 industry leaders. These experts overwhelmingly expect that rate’s impact on the affordability of housing “will be the most significant driving force in 2017.”

The Effect of Rising Rates on Buyers

When interest rates rise, mortgage payments rise. Because a vast majority of homebuyers rely on a mortgage to purchase a home, this limits the amount that these buyers can pay overall for a home. This reduces the affordability of housing for buyers.

The Effect of Rising Rates on Sellers

The secondary effect of this is that there are fewer buyers who can purchase homes. Aside from areas of the country where prices are rising for other reasons, the sale prices of homes will likely eventually drop. This chain reaction typically happens like this:

1. Multiple people are not bidding on the home, a behavior that would otherwise drive the price up in a healthy housing market.
2. Sellers who need to sell quickly to prevent foreclosure may reduce their price below market to sell faster.
3. Real estate agents and buyers who are researching comparable (what comparable homes sold for) will see these reduced prices, and they will determine what
someone selling can get for their home.

The Effect of Rising Rates on Real Estate Professionals

As buyers find it more difficult to afford a mortgage, we may move into a buyer’s market, in which there are more sellers than buyers. In a buyer’s market, the buyer and his/her agent typically have the advantage in negotiation because the seller needs to sell more than the buyer needs to buy, and there are fewer people to whom they can sell. This makes it easier for the buyer’s agent to find the perfect home for the client at the right price.

In a buyer’s market, the sellers may need to reduce the prices of their homes, and their home may take longer to sell. For a real estate agent, this may mean more work, but there is a silver lining.

How All Parties Benefit from Rising Interest Rates

In the shorter term, Trulia, another leader in real estate research, points out that this is a silver lining for buyers, sellers and real estate agents alike.

As the rates begin to rise, people begin “timing the market.” You may associate this with risky stock market investments, but timing the market is something we all do when we are informed and want to get the best value. Timing the market allows buyers to buy while rates are still low and sellers to sell their homes before the prices drop. This selling frenzy before the sale prices drop provides an excellent opportunity for forward-thinking sellers to sell before the prices drop.

In other words, both sides are encouraged to buy or sell now before the rates get any higher. Each time the rate goes up, they feel a new sense of urgency to buy or sell while housing is still affordable for the buyer.

This creates a sense of urgency in buyers to lock in rates and buy now rather than later. Timing any market always involves risks because you do not know when the highest and lowest points will be. However experts are expecting that the next several years will be filled with opportunity for those who know how to turn challenges into opportunities and position themselves to achieve greater success.

This is largely what we see now. Because the urge to buy outweighs the urge to sell, we actually see a shortage of homes on the market, which means sellers can ask, and often get, more for their homes.

An Exciting Time to Get Involved

If you are interested in the flux of the real estate market, now is a good time to pursue Master of Science in Management – Real Estate Management at New England College online. As the market continues to boom and then slowly begins to change, buyers will need the guidance and support of real estate experts. The program’s focus on both theory and practice can prepare you to lead both your teams and your clients as they navigate an ever changing buying and selling environment.





Real estate experts weigh in on the effect of rising mortgage rates on the market in 2017