Interest Rates and Real Estate: How Much Do Interest Rates Matter?

Over the past few years, we’ve seen big fluctuations in interest rates — from some of the lowest in decades to some of the highest. With such big changes, it can be hard to know how concerned you need to be about interest rates as a home buyer or seller.

Right off the bat, we want to reassure you that interest rates (high, low, or in between) are nothing to fear. But we understand how anxiety-inducing they can be. Knowing how interest rates can affect your home sale or purchase can help ease some of that anxiety and make your home transaction much less stressful.

To that end, read on to learn more about interest rates and real estate and how changing rates may affect your next home sale or purchase.

How Interest Rates Affect Buyers

Higher interest rates can make buying a home more difficult for buyers (especially first-time homebuyers), because higher rates typically translate into higher monthly mortgage payments. This can make affordability an issue for many homebuyers: as mortgage rates increase, affordability decreases.

Interest rates have a big impact on a buyer’s purchasing power (i.e., how much house they can afford). There are other factors that affect affordability, of course (including housing prices and down payment), but, in general, when interest rates rise, monthly loan payments rise. 

Here’s an example:

Say you’re purchasing a home for 400,000. If mortgage rates are on the low end at 4 percent, you’d be looking at a monthly payment of around $1,910 for a 30-year fixed rate loan. But if mortgage rates are 7 percent, your payments would be $2,661 for the same loan.*

*Note that this example doesn’t take into account down payment or taxes and fees.

You can see how, when interest rates are lower, a buyer can afford to buy a more expensive home than they can when interest rates are higher. In other words, a buyer has more purchasing power when interest rates are low, and less when they are high. 

However, let’s get a little long-term perspective on mortgage rates. While today’s interest rates (hovering just below 7%) may seem painfully high compared to the all-time low rate of 2.65% we saw in 2021, historically, they’re still relatively low.  

So what does this mean for a homebuyer? 

It means that, while interest rates are something to keep an eye on, they’re not the only factor in determining whether it’s the right time for you to buy. It’s important to do some research, consider your overall financial situation, and consult with a lender and your friendly neighborhood REALTOR® (😉) to help you decide if now is a good time to buy. 

How Interest Rates Affect Sellers

How much a seller is able to sell their home for is determined by a complicated mix of factors. For example, home prices are significantly affected by supply and demand. When supply (housing inventory) is lower than demand, prices increase; when supply is higher than demand, prices decrease.

Here’s where interest rates come in: interest rates affect demand for home purchases. 

As we mentioned earlier, rising interest rates make homes more expensive for buyers. This reduces the demand for housing inventory. When interest rates drop, demand (the number of buyers looking for homes) increases. In other words, when interest rates are high, fewer buyers are looking for homes. This means that a seller may have to reduce the price of their home in order to attract a buyer.

So does this mean that you shouldn’t sell your home when interest rates are high? Not necessarily.

In fact, home sales tend to be relatively resilient to interest rate shifts. This is, in part, because there will always be people who need to move. Life events — marriage, having children, changing jobs, etc — often dictate whether someone will buy a home more than other factors, including interest rates. 

If you’re considering putting your home on the market, but have been hesitating due to higher interest rates, consult with your REALTOR®. We have insight into the housing market beyond interest rates, and we can help you determine if now is a good time to sell.

How Interest Rates Affect Housing Inventory 

In addition to affecting buyers and sellers, interest rates also impact the number of homes available to buy. Here’s how:

Housing inventory is impacted by many factors, including the local economy, demographics, and new home construction. These factors are, in turn, affected by interest rate fluctuations. 

New construction, for example, often slows down when interest rates rise and home prices drop. High interest rates and reduced home prices can also make sellers hesitant to put their homes on the market. Both of these scenarios result in lower housing inventory.

When the supply of available homes is lower than the number of people looking to buy, that results in a housing shortage. We’ve seen this recently in MN, where we’ve had less than a two-month supply of homes available. This means that if all the housing inventory currently on the market sold, there would be no more homes available after only two months! 

So even when interest rates are high, that doesn’t mean it’s a bad time to sell your home. In fact, in the midst of a housing shortage, you might still get a great price for your home!

Looking To Buy or Sell a Home? Lean on the Centric Homes Team

While the relationship between interest rates and real estate can be complicated, knowing whether it’s the right time to buy or sell a home doesn’t have to be. All of us on the Centric Homes Team are ready to support you on your real estate journey with consistent communication, education, and accessibility…not to mention a lot of enthusiasm! (A.k.a., we can’t wait to see you in your next home!)