How Do Higher Interest Rates Affect Home Buying?
Let’s examine two factors to understand how higher interest rates affect home buying and selling. The first is how inventory, interest rates, and housing demand affect home buyer competition. The second is the effect of rising interest rates on local markets. For example, rising interest rates may have less of an impact than imagined on locations considered to be attractive.
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What factors affect home-buying competition?
Low Inventory
If there are fewer homes for sale than buyers are looking to purchase, competition can be fierce. Tight home inventory is often the case in markets with high demand and limited supply, such as popular cities or neighborhoods.
Low-interest Rates
When interest rates are low, home-buying interest increases because of manageable mortgage payments. However, low-interest rates can increase competition for homes for sale.
Affordable mortgage rates can result in multiple buyers for a home and over-list price offers. In these markets, buyers may waive home inspections and make other concessions to get the home of their dreams.
Increased Demand
Buying demand and competition can increase when population inflows exceed outflows. In these markets, higher interest rates may not affect home buying due to a steady need for housing.
An article in Forbes, the 10 States People Are Fleeing and 10 States People Are Moving To, presents information from a 2021 United Van Lines Annual National Movers Study. Various reasons for moving out of states include high taxes, the ability to work remotely, political differences, and increasing crime
Competitive Markets
Highly desirable locations, including resort property, can result in regular competition for homes on the market. In addition, areas with good school systems, low crime rates, good weather, outdoor activities, and other amenities can drive up home prices and desirability.
Supply and demand, interest rates, and the competitiveness of the local real estate market drive real estate sales. If buyers find an area attractive, higher interest rates may have less effect on home buying.
What is the effect of higher interest rates on home sellers?
Rising interest rates can discourage consumer and business spending. However, some purchases, like, buying a home, may be a practical consideration without a timeline less dependent on current interest rates.
Higher interest rates can limit real estate inventory by discouraging sellers from selling their homes. In addition, a low mortgage interest rate can make selling and buying less attractive if a new loan results in a higher monthly payment.
The thought of a higher monthly mortgage may mean that sellers considering buying may decide to stay put rather than face higher borrowing costs—unless they can pay cash for a replacement home.
According to the Denver Metro Association of Realtors’ April 2023 Report, baby boomers with equity in their homes now represent 39% of homebuyers.
Baby boomers have surpassed millennials, representing 28% of homebuyers, who have held the top spot since 2014.
Counteracting common beliefs about interest rates slowing home sales, Luxury Market properties in the Denver metro—homes selling for $1 million or more—are selling faster than before with median days on the market decreasing from twenty-three to eight, meaning 65.2% quicker.
In March 2022, the Luxury market led the Denver Metro area in pending and closed transactions. On average, luxury home sellers receive full-price offers and are in control of the selling process
What is the effect of higher interest rates on homebuyers?
At the same time, higher interest rates can affect buyers because even a slight increase in interest rates can raise a monthly mortgage payment by several hundreds of dollars. As a result, rising interest rates can lead to fewer buyers being able to afford a home, ultimately decreasing demand and lowering prices.
However, in a competitive market with limited inventory, buyers may still compete for available homes, even with higher interest rates. Denver, Colorado, is a market where home buying interest remains strong.
While days on the market slowed between December and February, average days in the MLS are close to October 2022, at 39 for detached homes and 33 for attached homes, even with rising interest rates
The good news for Denver Colorado real estate
In a competitive market with limited inventory—even with higher interest rates—homes that are priced competitively and are in attractive neighborhoods will still sell quickly. Sellers who work with educated realtors will prepare and price their homes accordingly. In addition, more availability over the summer might ease the competition for available homes.
The impact of high-interest rates, inventory, and demand will depend on many factors. If you are a home buyer or seller, it is essential to consider the local market conditions. For example, low housing inventory may lead to steady or rising home prices if you live in the Denver metro area.
Low home inventory may continue to impact the metro area for some time. Additionally, interest rates that may eventually rise to the rate of inflation may continue to bloat monthly mortgage prices.
So if you need to buy or sell, look at the current situation and evaluate how much more timing risk you are willing to take if you plan to buy or sell in the next 12 months. Now may be the opportune time.
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