The Effect Rising Interest Rates have on the Real Estate Market

Interest rates are on an upward trend over the two years. As they continue to rise, let’s look at the affect they will have on the housing market.

The biggest effect is going to be, as interest rates go up consumers buying power goes down. Here is an example of how this would look. Let’s say a consumer can qualify for a home payment of $1000 per month.  They do a down payment of 10%, and they get a 4% interest rate. That would qualify them for a property valued at $232,500. This was the case a little over 1 year ago. In today’s market with everything being equal, but their interest rate closer today’s market rate at 5% would allow them to buy a property valued up to $207,000. With the rising interest rate, they have lost $25,500 in buying power. This along with the higher home prices in today’s market, make in hard for the end retail buyer to buy homes. This can also start putting some down pressure on the market which will cause property price to slow or even start going down.

Another thing that will be affected by rising interest rates is ARMs (adjustable rate mortgage), because it is directly correlated to the current interest rates. As interest rates go down ARM interest rates will go down, but as interest rates go up ARM interest rates will go up as well. ARMS will have an introductory period where interest rates will not change. When the introductory period ends the interest will start following current market rates. If they are not refinanced into a fixed rate, their interest rates will continue to rise with the market. As the interest rates goes up their mortgage payments will go up. This may cause some homes to be become unaffordable to the home owner, which will result in more foreclosures taking place.

Interest rate are still at a historically low rate, but they have been rising over the last couple of years. As they continue to rise, there will be more downward pressure on housing prices. Interest rates are an important element to pay attention to in the real estate market.