How Does Rising Interest Rates Affect the Housing Market?

rising interest rates affect the housing market

How Does Rising Interest Rates Affect the Housing Market?

The rising interest rate has a different impact on asset classes. As the economy is expanding, the stock market, bonds, and nearly every industry experience fluctuation in the demand and price of assets. The real estate market tends to perform well when the interest rate is on the rise. Income-generating properties, especially, generate significant profits during this period. Rising interest rates indicate stability in the country’s employment, higher income, and increasing demand for residential and commercial properties.

At the same time, it creates an urgency in people to invest their savings in real estate before the mortgage rate increases drastically. So, what’s the connection between interest rate and the demand for properties? Read on to learn more about how increasing interest rates affect the housing market and what can you, as a buyer or seller, do to maximize your property’s value.

Rising Interest Rates and Real Estate Investors

The relationship between the real estate industry and the increasing interest rate is quite complex. When the interest rate spikes, homebuyers feel the urgency to invest in the first property they find in their locality. They are scared that they won’t get the best deal if the interest rate spikes again.

Your property’s value will appreciate with inflation. An increased interest rate will push the prices of every asset class upward, including rental income. So, inflation means a higher income for people who own a rental property. Besides, there is a high demand for rental properties during inflation since high-interest rates lead to fewer property development projects. That’s because the labor and machinery costs also skyrocket, leading to fewer people opting for construction. As a result, property owners increase the value of their rental properties, as well as properties they intend to sell.

So, should you buy a property or sell it during inflation? What will be more beneficial in the long run? 

It comes down to your goals. The biggest mistake of a homebuyer is sealing the deal because of the fluctuating interest rates. While interest rates have a direct impact on the real estate business, you should never buy or sell a property in a rush. Do not buy a home thinking that you won’t get a good deal if the interest rate changes again. Whether you are buying your first home or a secondary property for investment, take some time to understand the ins and outs of your investment.

If you ask your family, friends, and real estate agents, they will most likely suggest that you buy a property now. You may not be able to buy a house later when the mortgage rate will rise further. But that might not be the best decision. What if you buy a property at a high price and the interest rates decrease drastically in the next few years? It is important to evaluate different factors before making a purchase decision.

Buying Power Decreases with the Increasing Interest Rate

How do increasing interest rates affect the sellers? If we see it from a property seller’s perspective, it’s best to sell the home before the interest rate spikes to a point that your property becomes unaffordable for an average homebuyer. With fewer people being able to afford your house due to a high rate, the value of your property will decrease. Plus, homebuyers may want to wait till they have enough money for the down payment so that they can get a mortgage at a lower interest rate.

At the same time, you can sell your property at a good price when there’s a slight change in the interest rate. That’s because homebuyers are willing to pay your asking price just to lock in the deal before the property becomes too expensive. A rising interest rate is a sign of a strong economy, increased salaries, and increased stability in jobs. This might encourage aspiring homebuyers to put more money toward the down payment and purchase their house during inflation.

How Does High-Interest Affect Buyers and Sellers?

Considering these factors, it’s not hard to see why the property market is difficult to predict. A high mortgage rate may discourage buyers from purchasing a property, as they may not have enough savings for the down payment. So, they will wait until the interest rate decreases to invest in a home. As a result, the demand for real estate might decrease and you may have to sell your house at a fraction of the cost. But it may also have a positive impact on the housing market. Nervous buyers may purchase your house in the initial period of increasing interest rate in fear that the property will become unaffordable in the future.

So, What Should You Do?

First things first, interest rates will not increase drastically at once. The Federal Government increased the interest rate from 6% to 10% in 1987-1988. The market has seen the worst already. As a seller or buyer, the best you can do is take your time to research the market condition to make an informed decision. Do not buy and sell your property in a rush thinking that you won’t be able to get a good deal if the Fed increases the interest rate significantly. Talk to a real estate agent to get a better understanding of the current real estate market.

It is also important to work with an FSBO attorney if you are selling your house without a real estate agent. A lawyer will walk you through the legal aspects of a property deal so that you don’t end up making mistakes that might cost you hundreds of thousands of dollars as a legal penalty. A real estate attorney for the FSBO transactions will also educate you about the relationship between interest rates and the housing market so you can make better decisions. Find a reliable and licensed real estate attorney at FSBO Legal Services in Illinois and buy/sell your property at the best price. Do not make hasty decisions. Consult a real estate agent or an attorney before buying or selling a property during inflation.

If you are looking for an experienced real estate attorney for FSBO in Illinois, contact FSBO Legal Services in Northbrook, Illinois to help you with your FSBO transaction.