During the COVID-19 outbreak, an instant decrease in mortgage rates resulted in a skyrocketing demand in the housing market. However, due to supply shortage, the housing market started cooling down in the late 2020s, increasing mortgage rates from mid-twos to high sixes. As an inexperienced buyer, you might think purchasing a property in a slow market with high mortgage rates wouldn’t be a good decision. But there is a catch! In this article, you will understand that as a potential buyer, this might be an ideal time for you to purchase property. In addition, this article will also give insight into how higher interest rates can benefit you in the long term.
Benefits of Lower Interest Rates
While increasing interest rates impact overall affordability, a cooling market has unexpected benefits. Here are the three primary advantages of higher interest rates for property purchasers.
Low House Prices
Due to a supply shortage and excessive demand, housing prices rose by about 20% last year. However, higher interest rates are essential in resolving this problem. Increasing interest rates create a decline in house prices, a great advantage for home buyers. According to estimates, price growth typically declines by 5% for every 1% increase in mortgage rates. They also downsize the housing market by pricing many buyers out of the market.
Less Risk
As we know, eliminating contingencies can result in quick deal closing. Many purchasers waived contingencies during the last two years of fierce competition for several houses.
However, two significant contingencies—the inspection and the appraisal—were among those that were being waived. These are reappearing as the market stabilizes. Here are several reasons why that benefits purchasers.
1. Inspection
There are many dangers involved with buying a property. First, you are investing in a material object that can deteriorate over time. You can thoroughly inspect the property before buying in a sluggish market. After inspection, you might find critical factors and a chance to renegotiate the price.
2. Appraisal
Over the previous two years, the market benefited purchasers who paid cash and those who put down a sizeable down payment. It was due to the bidding wars that drove prices over the seller’s asking price. Appraisal contingency means buyers can withdraw from the deal if the appraisal value is lower than the offer. Since the market was at its peak, more people waived it to win a bidding war. However, that won’t be the case now.
More Housing Stock and Less Competition
Homes stay on the market a bit longer as demand declines, allowing inventory time to increase. The longer inventory remains on the market, the less severe the supply shortage becomes. Inventory was up by 19% over the last year in June 2022.
There are more options available for interested homebuyers due to two trends—rising loan rates and an increase in the number of properties on the market.
Homes are staying on the list even longer, though the sales velocity has been reasonably fast compared to the pandemic. An increase in inventory and less competition have allowed buyers to purchase their ideal homes, making this the perfect opportunity.
Effect of Higher Interest rates
Higher Interest rates primarily affect sellers, property value and real estate investments. So let’s find out whether it has a positive or negative effect.
On Sellers
Rising mortgage rates can have a different impact on sellers. For instance, Belle can offer her property at $400,000 if she wishes to sell it for that sum. However, because of rising mortgage rates, prospective purchasers can only afford her house for $355,000.
She may face significant danger from a 1% increase in mortgage rates. It might reduce Belle’s House market value by around $45,000. But she can still benefit from the transaction. Her profit will highly depend on how she plays in the market. However, you must understand the market thoroughly to gain from increasing mortgage rates.
On Property Value
Theoretical constructs represent that real estate prices and value depend on interest rates. Hence, the economy’s health matters.
Rising mortgage rates won’t impact home values and prices as much if the economy grows quickly. For instance, a one-point increase in mortgage rates would result in a $238 increase in monthly payments. An expanding economy would enable businesses to raise wages sufficiently to counterbalance the rise in interest rates.
On Real Estate Investing
Real estate investing may benefit if mortgage rates increase. This is because fewer individuals can qualify for mortgages, raising the market for rental house investments. Despite this, higher interest rates often make buying more advantageous since they drive down prices.
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