How Interest Rates Change Housing Prices

How Interest Rates Change Housing Prices

There are many interest rates in our financial system, and they affect everything from savings and CDs to credit card and mortgage rates. The fluctuation of interest rates is very complex, and involves the Federal Reserve, supply and demand, and currency valuation, among other factors. Although understanding the complexities of interest rates is out of the question for most non-economists, you can understand how mortgage interest rates affect you.


Higher interest rates mean lower property values

This isn’t always the case, but it’s generally true. On a $200,000 house, a 2% increase in mortgage rate will increase the monthly mortgage by nearly $250. Because of that, as interest rates rise people can’t afford the same amount of house, so they buy cheaper homes or put in lower offers. This tends to depress the price of the housing market. This can sometimes lead to some chain reactions as well. For instance, with lower home values and less buyers in the market, investors who pay cash might buy more property which will in turn impact the rental market.

What all this means to you is that if you’re buying, you want to lock in the lowest rate possible, but you want to be patient. If you’re on the fence about buying, but rates look like they might skyrocket in the next few months, it might be better to take the jump now. Talk to your lender, get the low rate and start shopping. If you’re selling, on the other hand, try to sell when rates are low. It might make sense to wait for lower rates so that you’re getting the best price when you sell.

Lower rates mean higher property values

This is just the opposite of course, but there are some important considerations. Since lower mortgage rates mean lower monthly payments, they tend to mean there are more buyers in the market. This can lead to a lot of competition for houses, with multiple offers on a property driving the prices higher. It’s important to be patient. Just because mortgage rates are driving property values up doesn’t mean the properties are actually worth more. The last thing you want to do is win a bidding war on a house that is overvalued. The market could come down when things stabilize, and you’ll be stuck with an inflated payment.

If you’re selling, of course, this is mostly good news for you. If there’s a bidding war for your house, you win!


There are lots of interest rates, and they affect the housing market in weird ways

Largely due to property investors, other interest rates will have a big impact on the housing market. If interest rates are low in bonds, and stocks aren’t offering great returns, investors might put more money into the housing market. Having a sudden influx of cash can great bubbles, and temporary price surges. It’s important to work with an experienced realtor who knows the market. If something odd is going on in the housing market, they might be able to advise you to wait a few months until things normalize.

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