Will Higher Interest Rates Hurt The Housing Market?

by Admin on April 10, 2013


If buyers have to pay more in interest to buy a house, they’ll have to go for houses that cost less, right? They have to make up for those extra costs somehow, it would seem. So higher interest rates surely hurt the housing market.

But it isn’t that simple.

Rising interest rates are a good sign for the economy as a whole, and with that good sign comes more consumer confidence, more job security, perhaps, and a greater willingness on the part of some potential buyers to make a home purchase because they’re in a better financial position.

Plus, housing is still very affordable even as both rates and prices in many areas rise.

The Background Info

When interest rates are low, conventional wisdom says that people are more likely to borrow money because the costs of borrowing are low. When rates are high, borrowing looks less attractive, so people are generally thought to stay in their current housing situations.

Obviously, then, homes are more affordable and should sell better when rates are low because the amount of interest added to a loan is less. If home prices remain the same throughout a period of low interest rates, home sales should stay steady. Holders of existing mortgages may even refinance to take advantage of the good rates.

But there are other factors. When rates are low, builders often build more homes because they can get money at a lower costs too, and this drives prices down. If they’re not careful, they can create a glut of homes that outpaces the demand created by the great rates.

There’s also a lender-side issue. Lenders don’t like to lend money at a discount when rates are low, so they may hold onto their funds a bit tighter.

The Reality

In reality, the housing market is much more complicated than this background information demonstrates.

In a good economy, new jobs are created all the time, and people must relocate to take advantage of them. These relocating workers must find a place to live, and if that means buying a home at a higher interest rate, they’re often willing to do that. The strong economy that created the higher rates also creates demand for homes in many cases.

And here’s something else to consider: Even if rates reach as high as 7 percent, they will still be lower than they were all but 4 percent of the time from the early 1970s until 2000, according to the statistics. In other words, interest rates are still remarkably cheap compared to what people were paying a generation or two ago.

This much is certain: Rates are likely to rise, and the availability of homes will shrink in most places as the supply and demand reach equilibrium. At that point, higher interest rates will probably start to make some difference, causing some slowing of home sales.

While you can’t describe the current situation in many places as a buyer’s market anymore, conditions for home buying probably won’t become any more favorable than they are now until there’s another economic downturn.

That means now’s the time to buy — and now’s the time to sell. In many areas of the country, it’s a unique situation where everyone wins, at least for the moment.

About the author

Brian Talley is the founder and CEO of Regent Property Group, which specializes in Austin luxury homes for sale and waterfront property on Lake Austin.

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