Rising Interest Rates. Lower Mortgage Demands.

As we all know, inflation has been rising since the start of the Coronavirus pandemic. As a result, the Federal Reserve recently announced that it would raise the interest rates to counter inflation.

When people borrow money, people are required to pay back the original amount plus an additional interest created from the rate percentage. Therefore, raising the interest rates discourages spenders from taking more loans, causing the demand for goods and services to drop, thus decreasing inflation.

Although the fall in inflation is good, what does this mean for the housing market?

Typically, low-interest rates encourage spenders to take out more loans on houses. But, on the other hand, if they are increased, the demand for housing goes down. This forces real estate lenders to react and increase their mortgage rates on properties.

According to the CNBC, “a homebuyer with a monthly budget of $2,500 could afford a home worth up to $517,000” but after June 15 the same homebuyer “could only afford a home worth up to $399,750”[1]. This drastic increase in mortgages pushes homeowners out of the housing market, where previously owned properties are now not affordable. At the same time, the increase in the interest rates makes it harder for homeowners to get new loans on houses that are now higher.

It simultaneously affects sellers by forcing them to price their homes competitively while maintaining similar sales. Sales of houses are also falling due to unaffordability, crushing the market, and decreasing revenue from real estate firms.

Although[1] [2] the housing market is currently cracked, an address to inflation is necessary to tame the economy. According to economic theory and past results, the current market should be momentarily and slowly recovering from its previous state.

Sources:

​​https://www.cnbc.com/2022/06/28/rising-interest-rates-cost-typical-homebuyers-16-percent-of-purchasing-power.html

[1] Winters, “Rising Interest Rates Have Cost the Typical Homebuyer up to $165,000 in Purchasing Power since Last Year.”