Often, we post blogs about micro things like when a real estate agent should go independent. Micro things, things that affect real estate agents directly, are ultra-important because not all real estate agents are the same.
However, macro things, like rising mortgage rates can also affect real estate agents. Mortgage interest rates can affect the entire real estate agent industry. It’s important that real estate agents understand the correlation between rising mortgage rates and home prices.
Check out information on rising mortgage rates and how they affect your real estate agent business.
What Happens to Home Prices When Mortgage Rates Rise?
The main assumption, that home prices lower when mortgage rates rise, isn’t factually correct. But, it’s not factually incorrect, either. When mortgage rates rise, home prices lower, but they won’t lower overnight.
The reason’s because most home buyers can afford an added percentage point or even two, onto their home loans. This makes absolute sense. Think about it this way: mortgage rates only rise, unless it was like what happened during the housing crisis when ARM rates kicked in, when the overall economy is doing well.
The Federal Reserve raises interest rates to beat back inflation. They raise rates to calm an economy before it overheats. When the economy overheats, inflation kicks in and our currency becomes less valuable. We need more currency to buy less. That also means the money from wages mean less as well.
When mortgage rates rise, it’s a sign that the economy’s doing well and that people working in the economy are also doing if not well, better than they were.
Why Do Home Prices Go Down in Rising Mortgage Rate Situations?
If this is true, why, or more importantly, when do home prices go down in rising mortgage rate situations. The biggest factor has to do with the rate of wage raises compared to mortgage rate rises. If wages don’t rise when mortgage rates rise, people cannot afford to buy homes at huge prices and pay high interest rates. Demand goes down while supply goes up.
Sellers must then lower their prices. This could be a good thing for sellers and buyers, or a bad thing for sellers and buyers.
It’s good for sellers because if they sell their homes at a lower price and are looking to buy at the same time, they also benefit from lower home prices. For buyers, purchasing a home at a lower price could more than offset paying the higher interest rate.
It could be a bad thing for sellers because if sellers aren’t looking to purchase a home, instead they just want to get out of their current home, they must sell at a lower rate. Buyers could get into a situation where in the long run they lose because they must pay the higher interest rate as opposed to paying more upfront for the home.
Either way, it’s the real estate agent’s job to address the varying situations with higher mortgage interest rates. Keep the above information in the back of your mind as you talk to buyers and sellers. Also, remember that money isn’t always the most important factor. If a buyer loves the home, they should buy the home even if it’s a high home prices and high mortgage rate interest environment.