High interest rates are impacting homebuyers and the real estate market. Mortgage rates are at the highest level in two decades. How the housing market is responding is creating financial headaches for buyers. The number of existing homes for sale is dropping, and new constructions are often selling before a realtor can put up a For Sale sign.
As a former real estate agent, current home renovator, and board member of my hometown bank, let me share some insights into the ways interest rates are changing how buyers and sellers act and react to the market.
Home Prices Are Too High for Some Buyers
To help combat rising inflation, the Federal Reserve has been increasing interest rates. Rising interest rates mean consumers are paying more to borrow money. This includes everything from swiping a credit card to applying for a mortgage. Consumers who could afford a mortgage payment in 2022 may now struggle to make the payments or even qualify for a home loan.
According to the National Association of Realtors, home sales have dropped by nearly 17% annually. Lender Freddie Mac states interest rates on mortgages are at the highest rate since 2001. To give you a better idea of what this means for your wallet: Your monthly payments on a $300,000 home loan are now around $330 more than if you'd bought it last year.
For some home buyers, this increase is forcing them to put their dream of owning a home on hold for the foreseeable future.
Houston Association of Realtors chairperson Cathy Trevino says, "Because of the interest rate, we have many buyers sitting on the sidelines. For first-time homebuyers, if they were looking and just kind of waiting this same time last year, they're probably kicking themselves saying, 'I should have bought.'"
Sellers Are Finding Themselves Stuck in Their Homes
Some sellers are choosing to take their homes off the market. This isn't due to a lack of interested buyers. Instead, the high interest rates force them to rethink their decision to sell their home.
Even if these potential sellers are still paying off their mortgages, it is cheaper than applying for a loan on a new home. In most cases, sellers may lose money after signing for a new mortgage.
According to Jeff Ostrowski, an analyst at Bankrate, "Many American homeowners just aren't going to move anywhere for a while. They don't want to give up their 3% mortgage, especially if they have to swap it out for a 7% mortgage. That's not great news for people who want to buy. It's constraining the supply of homes." Statistics from the housing market support these claims. There are around 15% fewer homes for sale than last year. This housing shortage can be good news for those willing to sell. However, buyers often pay a premium for existing and new builds. Once again, these premium prices only add to the already high mortgage payments.
Bidding Wars Are Becoming the Norm
Homebuyers expected bidding wars during the global pandemic as people flocked from crowded cities to the more spacious suburbs. However, even though the pandemic is over, bidding wars are still common.
Homebuyers should prepare themselves for this scenario. Sellers are not afraid to ask top dollar for their homes, knowing someone will pay their requested price. If you make an offer on a property, you should expect to join a list of other potential buyers.
Since several buyers are interested in the same property, the seller doesn't have to accept a low offer. Instead, the bidding war can net the homeowner more than their initial asking price.
The lack of available homes on the market only adds to the chances you'll find yourself in a bidding war.
Buyers Are Searching for New Construction
With fewer existing homes, buyers are looking for new builds. The number of new constructions is increasing, up around 31% compared to 2022.
While this is good news for homebuyers, it is doing little to offset rising mortgage rates, even with the price of a new home falling to increase sales.
Homebuyers are facing two dilemmas. The first is the number of available new homes. There are still more buyers than new homes for sale. The other obstacle is high interest rates. Even with price reductions, buyers still have difficulties affording higher-than-average interest rates attached to their mortgages.
Homes Are Getting Smaller
Like always, size does matter; only now is it getting smaller instead of larger. Along with dropping prices, home builders are also going smaller. Compared to large, spacious homes, smaller ones are cheaper to build, and these savings can be passed on to buyers.
The National Association of Realtors notes that average new home sizes are down from 2,359 sq. ft. to around 2,200 sq. ft. Even though the loss of about 100 sq. ft. doesn't seem like a downsize, it does make a difference.
Another change in the housing market due to higher interest rates is the popularity of townhomes and condos. A few years ago, homeowners were looking to get out of their multi-family complexes, and now it's becoming the place to be.
The lack of maintenance is an attractive selling point for some potential buyers. The HOA handles everything from yard work to building maintenance. However, compared to most stand-alone homes, the low selling point is driving the renewed interest in owning a condo or townhome.
Interest Rates Are Changing the Housing Market
High interest rates affect your decision whether you are a buyer or a seller. For sellers, it may make more financial sense to stay in their current homes. For buyers, the lack of existing homes and bidding wars over new ones make it difficult to find a property they love that fits their budget. As a buyer or a seller, it's up to you to determine when the best time is for you to move into the market.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
