Can The Housing Market Recover While Interest Rates Rise?

When interest rates on mortgages rise, how does it affect the housing market? While you may think that buyers would wait, there’s more to it than that. There’s also more to it than those looking for a home to live in. Interest rates can also affect investors, sellers, and home builders.

Buyers Will Be Forced to Buy Less

When interest rates are higher, people are forced to purchase a lower priced house in order to afford the mortgage payments. Let’s say that a $200,000 mortgage of 30 years has a 5% interest rate. The payments would be roughly $1075 per month. Should the interest rate rise to 7%, the payments would rise to $1330! That’s a 30% increase on monthly payments. In order to stay around the $1000 mark, the buyer would be forced to purchase a home that cost $40,000 less. This could result in a much smaller home in a less desirable neighborhood. Some buyers will choose to purchase regardless, but others may wait until they can afford a home that meets their needs and budget. A side effect of this is that sellers who don’t sell their homes will be less likely to purchase new homes.

Investors Will Be Less Likely to Purchase Distressed Homes

When interest rates are low, investors are able to purchase homes to flip for a profit or foreclosures that are greatly reduced in cost. Because the interest rates force home buyers to look at less expensive properties, investors may not have a chance to snatch up many properties. This means that what’s left on the market are homes that home buyers can’t afford and investors can’t make much of a profit from. Once the cheaper homes are purchased, home sales will fall drastically because buyers can’t afford to carry the mortgage of more expensive homes when interest rates are so high.

Building New Homes May Be Out of the Budget

Another area that suffers is new home construction. Most buyers are forced to purchase older, existing homes when the interest rates are high. This means that fewer and fewer new homes are built. Again, this causes more lower priced homes to sell, but eventually only expensive homes and new construction are left and the buying stops.

High interest rates can greatly affect the housing market. While the effects may not be immediate, there comes a time when there are no longer any affordable houses left for the average home buyer. This causes the housing market to suffer until interest rates begin to fall. While buyers may be interested in buying, it won’t change the fact that there aren’t homes in their budget. With fewer people buying, sellers are also unable to purchase a new home. It’s a vicious cycle. If you’re still not sure about your own situation and budget, you can find advice here before you take action.