What Higher Interest Rates Mean for Our Real Estate Market

In response to persistently high inflation, the Federal Reserve has raised interest rates five times this year and is expected to raise rates again at their November meeting. After two years of record-breaking appreciation in home prices fueled by low-interest rates and high demand in response to the coronavirus recession of 2020, the rate hikes are putting the brakes on a red-hot housing market characterized by bidding wars and low inventory.

What do rising interest rates mean for homebuyers?

Increasing mortgage rates are pricing many buyers out of the market making it especially hard for first-time buyers which make up 45% of purchasers. Homebuyer purchasing power has decreased significantly. At the beginning of the year with rates at 3.25%, a homebuyer who wanted to keep their payments around $5,000/month, could buy a $1,100,000 home. With today’s rates rising above 6.25% for the same monthly payment, they would be able to purchase a home at $850,000.

The good news for homebuyers is that there is a more balanced market which means less competition, fewer multiple offers, more homes for sale, and fewer homes selling above the asking price. For those buyers who were outbid or sat out because they had to sell a house to buy, there is more opportunity to see home sellers willing to accept their terms.

What do rising interest rates mean for home sellers?

While well-priced homes are still selling quickly, the “days on the market” to sell a home has been increasing. Earlier this year a seller could expect their home to sell in one to two weeks with multiple offers. Now, seller expectations will need to adjust to one to two months to sell with possibly only one offer. Less qualified home buyers mean fewer homes selling and slower price growth.

In many areas, the good news for home sellers is that despite the lower number of qualified buyers there is still a housing shortage. Therefore, there is less competition among sellers. However, it is still very important to stand out in the marketplace to attract those qualified customers. To prepare their homes for sale, sellers should consider pre-sale home inspections and stages as initial steps that will make their houses shine.

Additionally, many sellers who want to realize the tremendous appreciation and equity accumulated in the recent real estate market may want to consider selling sooner rather than later. There are also tax benefits that can lessen the cost of selling for homeowners, such as Proposition 19 and federal capital gain exclusions. Please be sure to check with your CPA to see how these tax benefits apply to your individual situation.

Now more than ever, it is important to have a trusted, knowledgeable and experienced real estate professional by your side to guide you. My passion is to offer creative strategies to help my clients achieve their real estate goals. If I can be of service, contact me for a confidential consultation.