The Impact of Rising Interest Rates on the Real Estate Market

Mortgage interest rates reached record lows during the Covid-19 pandemic in 2020 and 2021. However, with the inflation increases of the past year, mortgage interest rates have spiked to their highest levels in two decades. 

Read more about how rising interest rates affect the real estate market below.

How Do Rising Interest Rates Affect the Economy?

To fully comprehend how rising interest rates affect the housing market, it’s essential to examine their effects on the economy at large. Below, we’ve compiled a list of rising interest rates’ most significant economic impacts.

Higher cost of borrowing
When interest rates increase, so do the cost of credit card and loan payments. This increase discourages prospective homeowners from borrowing money to put 
into a mortgage. Ultimately, people cut back on spending when interest rates rise, especially those with existing loans.

Saving instead of spending
Consumers tend to save rather than spend when interest rates go up. While higher interest rates indicate a higher cost of borrowing, they also cause deposit accounts to offer more attractive returns. Therefore, consumers often keep their bank account full rather than take out money for purchases.

Currency value rises
Currency value increases alongside interest rates as countries attract more deposits in 
their banks. As a result, demand for the nation’s currency increases, and its value generally goes up.

Lower consumption and investment
Like individual spending, company investments also generally decrease when interest rates rise. Due to their lack of confidence in the economy, companies will often reduce their investments and cut down on spending altogether. 

What Causes Interest Rates to Go Up?

Interest rates can fluctuate due to a multitude of economic factors. Below, we’ve compiled a list of the most prominent causes of interest rate increases. 

A growing economy
Central banks prepare for incoming inflation by raising interest rates when economic 
growth is on an incline. This raise is intended to reduce consumer spending and stabilize economic growth, which increases borrowing costs and lowers disposable income among consumers. 

U.S. Federal Reserve rates
In most scenarios, U.S. Federal Reserve rates increase alongside interest rates. Banks and other financial institutions profit from charging consumers and businesses a percentage above their borrowing costs to the U.S. Federal Reserve. And when the government increases its lending rate, the rates offered to the market also increase. 

Lenders’ actions
Rising interest rates can sometimes cause lenders to raise their borrowing costs. For example, if mortgage rates were to plummet significantly, this would cause an overall increase in mortgage applications as prospective homeowners would want to take advantage of the lower rates. However, this increase in volume could overwhelm lenders and ultimately inspire them to increase their rates to dissuade new applications. 

How Do Rising Interest Rates Affect Home Buyers and Sellers?

Rising interest rates conventionally make buying a house more difficult for prospective homeowners. As mortgage interest rates increase, buyers’ affordability decreases, and their scope for higher-priced homes narrows. For example, if a prospective home buyer wants a 5% interest rate on a 30-year fixed mortgage for a $500,000 home, their monthly mortgage would be around $2,684. However, if the buyer only qualifies for a 6% interest rate, their monthly payment would increase to nearly $3,000. Therefore, a higher interest rate decreases a buyer’s purchasing power.

Because rising interest rates affect buyers’ affordability, they consequently impact sellers as well. For example, if a seller wants to list their home for $500,000, they have every right to do so. However, a $500,000 listing may exceed most buyers’ budgets due to rising interest rates. Though the seller can still make a profit on the sale, they likely will receive offers lower than their asking price. Even a 1% increase in mortgage rates could significantly diminish a home’s market value and lead to lower home offers.

In this market, we have seen sellers that have tried to force buyers to purchase at the original offer if the interest rate went up while the property was under contract. We have also seen situations where the seller cut the price, or agreed to pay some of the lending costs to get the deal done. In other scenarios, a seller may not be able to qualify for a loan at the higher mortgage rate. 

Ritter Spencer Cheng has a team of real estate litigation attorneys in Dallas, Texas, who can help property owners navigate their housing disputes. Our experienced attorneys develop practical and actionable strategies to aid fraudulent real estate sales, commercial lease disputes, resident and property owner disputes, and more. Learn more about our practice areas by connecting with our team of real estate litigation attorneys at Ritter Spencer Cheng today.