This Is Why Higher Interest Rates Are Good For Homebuyers And Bad For Sellers

February 16, 2022

You know a higher interest rate means a higher interest payment. That is a given. However, as a buyer, higher interest rates do three things. They push investors out of the housing market, they stabilize home prices, and they push uneducated buyers out of the market. And for sellers higher interest rates shift the market away from a seller’s market back to a buyer’s market. 


Here’s how.


This Is Why Higher Interest Rates Are Good For Homebuyers And Bad For Sellers.


You know a higher interest rate means a higher interest payment. That is a given. However, as a buyer, higher interest rates do three things. They push investors out of the housing market, they stabilize home prices, and they push uneducated buyers out of the market. And for sellers higher interest rates shift the market away from a seller’s market back to a buyer’s market. 


Here’s how.


Why do investors leave the housing market with higher interest rates?


The answer is that the higher interest rates cause a decrease in rents and return. An investment property is just like a business; it needs to generate enough revenue to cover expenses, including upkeep costs, servicing fees, and of course taxes. As interest rates go up investors need to charge more rent per month to cover expenses. This means that the overall return on investment decreases.


Why do home prices stabilize with higher interest rates?


A lot of people are mystified when I tell them that interest rates have to rise before housing prices can fall. They think the price a buyer can afford is a function of his income. So if incomes are falling, how can the price he can pay stay the same?


Higher interest rates allow buyers to qualify for more homes for the same monthly payment.


A $200,000 house at a 6% fixed-rate mortgage has a monthly payment of $1458. A $200,000 house at a 6% adjustable-rate mortgage has a payment of $1453. That's $5 less on a monthly basis, even though the buyer's income is 20% lower. He can therefore afford a more expensive house.


The higher interest rates create room for increased bidding by buyers. The higher rates also reduce the incentive to become an investor buyer; investors bid up prices against would-be home buyers. Higher interest rates, therefore, reduce competition from investors and allow more room for non investor buyers to outbid each other. Buyers can afford more expensive houses and compete for them. The result is that prices stay about the same even as incomes fall.



Why do uneducated homebuyers leave the housing market?


This is pretty simple. Buyers who don’t want to “spend more money” leave when the interest rates go up. The reality is higher interest rates don’t hurt the buyer as explained above, they stabilize and even reduce home prices. Even better for the buyers who stay in the market, the uneducated buyers leaving further reduces competition in demand.


You no longer have to compete with 20 bids for a house that doesn’t meet your family's must-haves, needs, and wants. You will have the freedom to look at various houses, weigh the pros and cons, and bid at or below the asking price. And that’s the beauty of higher interest rates… normalcy in the housing market.


So, if you want to know your buying power at 3.5%, 4.5%, or even 5.5% give me a call at 727-543-1753. I can better understand your wants, needs, and must-haves. Together, we will create a buying strategy that can compete regardless of rates and competition.


To learn more about me, Dottie Spitaleri, visit https://www.ddamortgage.com/dottie.


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