Housing costs have skyrocketed during the pandemic due to a mix of low supply and historically-low interest rates. As young professionals are going remote for work, they’re leaving the big city in favor of a quiet life in the suburbs. This migration mixed with a rocky supply chain has seen some markets increase by over 20% in less than a year.
How Interest Rates Impact Price
Homeowners and hopeful buyers are curious with news that the Federal Reserve, typically referred to as the Fed, will be taking steps to increase interest rates this year. While the real estate investors have already swooped in early to maximize profits, those looking to purchase a family home have been patiently waiting for a change.
As interest rates increase, buyers will slowly back off and bidding wars will slow to a rare occurrence. Much of the recent price increases have been due to such high demand to take advantage of extremely low fixed interest rates. Removing the pool of buyers only interested in the lowest rates will reduce demand and lead to sellers lowering their prices.
What the Changes Could Mean for Real Estate
The question being asked all over right now is whether or not the higher interest rates will ultimately lead to lower housing prices. In theory, the answer is a simple yes as higher interest rates are used to stabilize the market. What we’re seeing in 2022 is that there are more variables in play, but in the end it’s still a win for buyers.
Even if demand remains high, it will be full of buyers lining up with requests for discounts or price adjustments. This notion has already started sweeping through large markets such as Austin, TX and Phoenix, AZ, and for good reason. A hike in interest rates hits high-priced homes the hardest.
Take a home worth $400,000 and match it with the historical low of interest rates which is 2.8%. Over the life of the loan, you’ll pay about $200,000 in interest making the true cost of the house $600,000. Now if interest rates hike to 6%, the total interest is now over $450,000 and the same house has an overall price of $950,000.
Seeing the numbers it’s easy to understand why even a one or two percent increase on interest rates can deter buyers. When buyers refuse to pay premium prices due to high interest rates, sellers will be forced to either stand aside or go with the changes and lower their prices.
Be Prepared To Make an Offer
With the hottest real estate market cooling down, now is the time to get your books in order and ready an offer. Anyone looking to take advantage of lower house prices is encouraged to reach out to the Potempa Team. Our seasoned experts leverage local insights into the housing submarkets found in the states we serve.
Don’t let another buyer beat you to the punch, prepare for your home purchase with the Potempa Team today!