How Will Rising Interest Rates Impact the Real Estate Market?

News reports in March showed interest rates rising quickly in the real estate market. The benchmark 30-year, fixed-rate mortgage rose above 3% for the first time since July 2020. It was up five basis points to 3.02% for the week ending March 4 from the previous period.

The upward movement in rates corresponds with the shift in the bond market, which recorded the highest rise in February since the 2016 election. It’s essential to note that according to research, the current rate is still well below the 20-year average of 4.9%.

This increase worries some parties due to its during a shortage in homes effect on U.S. real estate; it’ll be more expensive to buy a home. Also, fewer people will want to borrow when the interest rate is up. According to the Mortgage Bankers Association’s weekly mortgage applications survey, the number of loan requests dropped 11.4% from the previous week.

So if you’re looking to find a place to move, you’ll have cause for concern. However, as you’ll see as you read on, rising interest rates don’t affect all property sectors and locations. You can still find some excellent deals in certain parts of the country. This also depends on the type of home you’re seeking.

Today, you don’t have to do all the research yourself. There are websites with experts that provide the assistance you need. For instance, as TheUrbanAvenue states, you can find your next apartment fast and for free with a professional online service.


Understanding Interest Rates

When you take out a loan, you’ll pay an interest based on the rate the lender fixes. The higher the interest rate, the more you’ll have to pay over the time it takes for you to pay off what you’ve borrowed.

The same practice applies to financial institutions and banks when the U.S. Federal Reserve lends them money. These entities then offer loans to businesses and individuals at an inflated rate, which is how they earn their profit.

Economic Effects of Rising Interest Rates

To understand how an increase in interest rates will affect real estate, let’s take a look at how it impacts the economy as a whole:

  1. Higher cost of borrowing – When interest rates go up, credit card and loan payments become more expensive. This situation will discourage people from borrowing money and they’ll reduce their spending. These costly monthly repayments also mean less disposable income for those who have existing loans. They’ll cut their expenses on other consumables.
  2. People save money rather than spend it – While it costs more to borrow, higher interest rates also mean that deposit accounts offer attractive returns. It’ll be better to keep cash in the bank than use it on purchases.
  3. The value of a currency rises – Countries may attract deposits in their banks because of the higher interest. There’ll be an increase in demand for the nation’s currency, causing the value to rise. Exports become more expensive, which will affect the revenue for the country.
  4. Lower consumption and investment – The rate increase will do more than curtail individual spending. Companies are likely to reduce their investments also because they have less confidence in the economy.
  5. Government interest payments increase – Countries borrow money too. A rise in the nation’s interest payments could lead to a future hike in taxes.
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What Causes Interest Rates To Go Up?

Several factors influence the increase in interest rates in the U.S., including:

A Strong Economy

When the economy is growing fast and the government predicts inflation, the central bank typically raises interest rates. The purpose of this is to increase borrowing costs and reduce disposable income. The result will, in turn, restrict consumer spending and slow down economic growth, bringing more stability.

U.S. Federal Reserve Rates

Banks and financial institutions earn a profit by charging individuals and businesses a percentage above what they pay to the U.S. Federal Reserve on their borrowing. As such, if the government increases its lending rate, the rates offered to the market go up as well.

Relationship With Long-Term Bond Yields

Mortgage rates typically move in line with long-term bond yields, especially the 10-year Treasury yield. 

Senior economists explain that the recent increase resulted from the White House’s positive vaccine news and the House of Representatives approving the additional stimulus payments. Those events led to investors withdrawing from the bond market, thus pushing interest rates upwards.

Lenders’ Actions

Some situations can lead to lenders raising the cost of borrowing. For example, when mortgage rates plummeted to record lows due to the refinancing boom in 2020, financiers could not meet the demand. They weren’t able to cope with processing the volume of applications they received.

As such, some lenders decided to increase their rates to dissuade new applicants from adding to their workload so they could clear the backlog.

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Effects of Interest Rates on the Property Market

The housing market is directly affected by rate changes because most people buy homes by borrowing money or specifically taking a mortgage.

Lower Interest Rates

Typically, people borrow when the interest rate is low because it’ll cost them less than at other times. Conversely, the level of borrowing will be lower when the rate is high because they’ll have to pay extra throughout the loan.

This practice is the same when it comes to mortgages. People are very likely to buy a property when it’s cheaper to borrow for that purpose. Consequently, it’s more affordable to purchase a home, and the property market grows.

People with an existing mortgage can choose to refinance when the interest rate is lower. This course of action will reduce their future repayments.

It’s not only individuals who’ll borrow money when the cost is low. Housing development companies will also take advantage of the situation to get financing to build additional houses.

Since more people want to buy homes when the mortgage cost is cheaper, property prices generally go up. However, when the houses become too expensive, the demand can drop and cause the price of dwellings to plunge.

Rising Interest Rates

Typically, when interest payments rise, prospective buyers may decide not to take out a mortgage at the time. They’ll likely defer their home purchase. This reduction in the number of purchasers can lead to an oversupply of dwellings. 

However, experts say that rising interest rates can have a positive impact on the property market. Excess supply usually means that housing prices will drop. This situation provides an opportunity for first-time buyers and those who have a comfortable cash buffer to buy. 

That scenario is why sources say an increase in interest rates can help ease the housing affordability crisis.

modern real estate

Other Effects of Rising Interest Rates

It’s not only individual homebuyers who’ll react to rising interest rates in the real estate market. Other sectors, including investors, will also be affected. 

For those who have a stake in leveraged assets, higher rates may mean lower cash returns. The cost of buying investment properties will increase as mortgage rates go up.

Housing loan rate increases can benefit parties who own dwellings for rental purposes. As potential buyers shift their focus from purchasing homes, they may instead look into renting. 

The growing number of renters can help owners solve their vacancy problems. When supply can’t meet the increasing demand, rent goes up, which will improve cash flow and income for landlords. If you’re an investor in rental properties, your portfolio will grow too.

Will Rising Interest Rates Adversely Affect the Property Market?

Theoretically, an increase in interest rates in the real estate market can negatively affect the property market by softening demand for buildings and homes. Fewer people would borrow money at such high costs just to buy a house. Many would prefer to sit and wait till it’s cheaper to take on a mortgage.

However, Jonathan Woloshin, a real-estate, and lodging analyst suggest that most potential homebuyers will be able to handle a slight rise in loan rates that’s lower than 1%. He says that, though we’re mindful of how an increase in mortgage rates can affect buyer psychology and finances, it’s essential to appreciate what it means for one’s monthly payment.

He makes his point by giving the example of a home costing $308,300. With a 10% down payment, if mortgage rates rise to 4%, the monthly loan repayment would only go up by $117. As homes are long-term investments, small increases in interest rates would still keep prices attractive for many buyers. 

Woloshin adds that steady increases in mortgage rates will help slow down the appreciation rate of home prices. This is positive for the long-term standing of the real estate market.

However, other parties take a more conservative view of the market. Based on the Mortgage Bankers Association’s report, it appears that the inflated mortgage rate has a dampening effect on home buyers’ enthusiasm.

A chief economist with a realtor company said that during a shortage in homes, rising rates and house prices would pose a significant challenge for many home buyers.

keys to property

Time Lag Before Effects Are Felt

Rising interest rates can take as long as 18 months to reveal their overall impact. Those who are midway into a development plan are likely to see it through to completion. 

On the other hand, due to a lack of confidence, some parties will take a more cautious approach and not start new projects.

Other Contributing Factors

The impact of inflated interest rates also depends on several factors, including: 


The rise in rates typically doesn’t apply to all lenders. Due to competition in the real estate market, there’ll be financial institutions that choose not to pass on the increased rate to their customers. They’ll absorb part of it at the expense of reduced profits.

Homebuyers can shop around for a better mortgage plan.

Confidence in the Economy

If people believe that the economy is strong and their income will grow at a rapid pace, and they’ll be able to afford the high borrowing cost, they’re likely to go out and purchase their home.  

Conversely, if confidence is low, buyers might not go ahead with their plans, even if mortgages are cheap.

Consumer Financial Status

There’s a concern that as people are accustomed to low rates for a long time, they might not be able to deal with an unexpected rise unless they’ve set aside plenty of money. 

However, those who are prudent in their spending and have been saving up for a home purchase are likely to have a buffer; they can typically weather any upward shift in mortgage costs.

How Interest Rates will Affect the Real Estate Market

As we’ve seen, it’s challenging to conclude how rising interest rates will affect the real estate market. There are so many factors and scenarios that can lead to a positive or adverse situation.