Since reaching near all-time lows, mortgage interest rates have jumped to over 6% for 30-year fixed-rate mortgages. That’s a pretty substantial increase in less than two years, and it makes affordability a bigger issue for many home buyers. But on the flip side, higher rates likely mean falling home prices, which until recently have been soaring. So let’s dig in and see how rising rates and falling prices impact Rochester home buyers.
How Rising Rates Impact Home Buyers
In response to the economic impact of the pandemic, the Fed lowered interest rates. But then, a short time later, inflation set in, and to help control rising inflation, the Fed raised interest rates. “When the Federal Reserve raises the federal funds rate, it tends to lead to higher interest rates across the economy. Mortgage rates are no exception.”
And these rising rates will impact Rochester home buyers in several ways . . .
- Buyers qualify for a lower loan amount. “The amount of a pre-approval from lenders is based on both your down payment and the monthly payment you can afford based on your debt-to-income ratio (DTI). Because your monthly payment is higher, you’ll have a lower loan amount you can handle. This could particularly impact first-time buyers because they don’t have the money from the sale of a home to offset a lower loan amount with a higher down payment.”
- Buyers may find it more difficult to find homes in their price range. “Right now, there’s not enough inventory on the housing market to keep up with supply, particularly when it comes to existing homes. For this reason, pent-up demand could sustain higher prices for quite a while. Some buyers may be temporarily priced out of the market.”
- Mortgage payments will increase. Basically, this effect of rising rates will mean that you pay more of your monthly budget on the house payment.
The Good News About Rising Rates
The rising rates for mortgages, as we mentioned, can ultimately be traced back to the pandemic. “[T]he U.S. government fought hard to avoid financial fallout and lower economic output by boosting the economy with stimulus checks and financial support measures. However, that sent inflation out of control.” And the Fed’s response was to raise interest rates. This may wind up being good news for home buyers. Here’s how . . .
“No government is happy to sit back and watch inflation destroy its country, so the Fed increased its fund rate recently. When the fund’s rate is higher, it affects banks, causing interest rates to rise and compensate, including mortgage rates. This discourages borrowing and spending, keeping inflation low – and possibly leading to deflation, resulting in lower house prices. When mortgage interest rates increase, a mortgage generally costs homebuyers more. . . . The basic laws of supply and demand dictate that higher prices result in lower demand, causing house prices to fall.”
Reduced Demand and More Inventory
According to industry experts, “[t]he pandemic saw a sharp rise in people purchasing properties thinking they had the perfect window of opportunity to get onto the property ladder or move house. Several factors were behind this trend, and one was the extremely low mortgage rates – it seemed like the ideal time to take advantage of conditions while they lasted.”
The result was a huge demand for housing and not nearly enough inventory to meet that exploding demand. But now, owing in large part to raising rates, demand is beginning to decrease, and supply will soon be able to keep up with demand. Home buyers will have more options now and a better chance of finding the home they want in their price range.
In addition, according to the law of supply and demand, with a smaller pool of buyers and less demand, prices will likely go down. “The effect of the rise in the federal funds rate on demand is two-pronged. Higher mortgage prices are likely to reduce demand for houses directly – but rising inflation has increased the cost of living, meaning there’s a lower number of people who can afford a home right now.”
But You Still Need an Experienced Rochester Agent
Having rising rates is never an ideal situation for home buyers, it may very well result in falling prices and less competition. It “doesn’t have to keep you from going from a prospective home buyer to the newest American homeowner. It all depends on your financial situation and whether you’re comfortable taking on slightly higher monthly mortgage payments.”
And it also depends on having the professional real estate assistance you need. Prices may be coming down and competition lessening, but it remains a tough market for buyers. That’s why it’s so important for Rochester buyers to work closely with a good local agent. An experienced agent can help you find the home you want despite the competition and then help you negotiate a better deal. So if you’re ready to buy in the midst of these rising rates, be sure to contact us today at 5076967510.