How Will Interest Rates Affect the Housing Market?

Discover the impact that fluctuating interest rates have on the housing market and how you can best prepare yourself when they start to rise.

Sale-Leasebacks
April 9, 2023
How Will Interest Rates Affect the Housing Market?

Within the last year or so, things normally outside of our ordinary topics of conversation have generated more chatter than ever. This time last year, we weren’t yet discussing Will Smith and Chris Rock at the Oscars, nor were we paying much thought to interest rates. But the circumstances of today (in popular culture and the housing market) have brought both of these to the forefront, and we at Truehold intend to clear the air around fluctuating interest rates. (As for Will Smith and Chris Rock, we’ll leave that to the pop culture pros!) 

Read on as we unpack today’s interest rates, what housing market interest rate trends mean for homeowners, and how you may be able to use current market conditions to your advantage. 

Understanding Interest Rates

Before we explore the connection between rising interest rates and the housing market, let’s first look at interest rates alone. 

Be they for a credit card, a car, a small business loan, or a mortgage, interest rates refer to the fee associated with borrowing money. These rates will vary according to a borrower’s credit score, income, and existing debt, with lenders assessing the risk of a loan according to this information. 

Smaller, lower-risk loans typically warrant a lower interest rate, while high-dollar, high-risk loans may come with a heftier penalty. And though these percentage points might not seem like much in the grand scheme of things, they can add up quite quickly –– a $50,000 auto loan at 3% APR (annual percentage rate of interest) for 60 months totals just under $54,000. Up that number to 7% and the total loan value is nearly $60,000. 

These average interest rates are used by banks and will adjust industry-wide when economic conditions or consumer behaviors shift. In the case of recent interest rate surges, the culprit has been our dreaded inflation: the more we borrow, the higher our national interest rate climbs. 

So, as a means of deterring borrowers from taking on more debt and creating higher inflation, the interest rate must go up. But while a bank may offer you a specific rate, it’s the United States Federal Reserve that determines this rate, ensuring no money is “lost” when a loan is offered while nudging the economy in a certain direction.1 

How Are Interest Rates Tied to the Housing Market? 

The above example is of a fixed interest rate: a type of interest rate commonly seen in home loans wherein the interest rate remains the same year over year. An adjustable-rate mortgage (ARM), on the other hand, may see this rate fluctuate to mirror economic conditions. So, taking out an adjustable-rate mortgage when the economy is in a gully seems like a great deal. But when the economy picks back up, and the Federal Reserve no longer needs to incentivize borrowing, this ARM can quickly get out of hand

But even if you signed on for a fixed-rate mortgage, changing interest rates can still impact you –– especially if you plan to refinance. With a fixed interest rate, what you see is what you get. Oftentimes, however, this consistency comes at the expense of a higher rate. If you borrowed at a time when rates were high or your financial situation was a bit shakier, lower rates, greater financial stability, and increased home equity may make refinancing very appealing. 

Check out our resource for a deeper dive into the relationship between rising interest rates and the housing market. 

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What an Increased Interest Rate Can Mean

From what we’ve learned so far, rising interest rates are intended to deter people from borrowing money and adding to the debt pile. There’s a reason the Federal Reserve and central banks have stuck with this strategy: it works. And in the case of the real estate market, rising interest rates mean lower housing demand and, usually, lower prices. While some red-hot markets will maintain their demand better than others (we’re looking at you, Raleigh and Austin!), others will likely see an end to the years-long streak of record-high prices.

But the simple fact is that people who need to buy homes will still buy them –– they just might be smaller, cheaper, or in lower-cost areas. To this effect, higher interest rates can send ripples through the entire housing industry, changing the cities we live in in the process. 

What a Decreased Interest Rate Can Mean

On the other end of the spectrum, decreased interest rates are designed to kickstart economic activity. At the end of 2020, rates on a 30-year mortgage were as low as 2.68%, spurring the feeding frenzy, which has only recently subsided.3 But aside from creating record demand in the housing market, these decreased rates saw millions of homeowners refinancing their home loans: nearly a quarter of all homeowners, according to Lending Tree.4 

For current owners looking to sell a home quickly, waiting for decreased rates can play to your advantage –– twice. First, when you list, these lower rates can mean more buyers, more competition, a higher asking price, and maybe even a bidding war. Then when you close, you can turn around and score a reduced rate on your next property. With that said, you might also find yourself on the other end of a bidding war. 

Factors That Can Affect Interest Rates

We’ve mentioned things like inflation, economic conditions, and the individual risk indicators that can affect interest rates, but there are other forces also worth mentioning. 

Policy and Government

While the Federal Reserve plays a key role in establishing set interest rates, there are other government activities that can also have an impact. Elevated government spending and “expansionary” activity, like the stimulus checks many Americans received during the COVID-19 pandemic, can lead to rising rates.5 This activity is known as fiscal policy, or the ways in which the government influences the U.S. economy. 

Money Supply

It might be strange to think about there being a “supply” of money, but it’s true –– just like the money in our individual checking accounts, the money available to the entire U.S. economy is finite. When money is in no short supply, the Federal Reserve does not need to disincentivize borrowing, so interest rates remain the same or even dip. But when supply is fading fast, the Fed will exercise its powers to slow borrowing in the form of rising rates.  

Money Demand

The law of supply and demand relies on the presence of both, and the relationship between these two powers can greatly impact interest rates. If money supply is high and demand is equally so, rates will likely remain the same. But when supply outpaces demand and the economy begins to slow, a reduced interest rate can help to light a fire under borrowers. The opposite is also true: Short money supply and demand might mean stagnation, but if the scales tip in demand’s favor, a higher interest rate might be implemented as a deterrent. 

An Overview of the Current Housing Market (and How Homeowners Can Benefit) 

Armed with a better understanding of interest rates and the factors that influence them, let’s zoom in on the current real estate market –– and how homeowners can benefit.

Housing Market Interest Rates

Whether you’re a homeowner, an aspiring buyer, or a homeowner who hopes to buy something new, you’ve probably had an eye on the ever-fluctuating interest rates the last few years have featured. If not, here’s a look at the current average rates according to information gathered by Nerdwallet.7

  • 30-year fixed mortgage: 7.184%
  • 15-year fixed mortgage: 6.347%
  • 5-year adjustable-rate mortgage APR: 7.065%

*As of March 12, 2023

Compared to this time last year, housing market interest rates have nearly doubled –– or, in some cases, more than doubled

  •  30-year fixed mortgage: 4.094%
  • 15-year fixed mortgage: 3.306%
  • 5-year adjustable-rate mortgage APR: 3.127%

While it’s highly unlikely that we will see rates as low as the ones above, those not in urgent need of a new home might be better off waiting –– and homeowners with plans to refinance might want to do the same.  

Housing Prices

If you are wanting to sell your home or purchase a home at the right time, it is important that you fully understand the best time of year to sell a home. According to Redfin, housing prices in January 2023 were 1.4% higher than they were at the same time last year.6 Overall, however, these house prices will seem far lower than what we were seeing at the market’s three-year peak in May of 2022, largely due to current interest rates and other side effects of inflation. Of course, certain parts of the country are seeing greater demand and higher prices despite increased interest rates –– with homes in Raleigh, NC, Austin, TX, and Tallahassee, FL fetching sustained high prices.

Homeowners in these markets stand to benefit most whether they plan to sell or not, as there’s a good chance the home’s value has gone up since it was purchased. If you’re considering a home equity loan or Truehold’s Sale-Leaseback, you can still capitalize on the hotter-than-average market conditions. Just note: If you’re considering a home equity loan or a home equity line of credit (HELOC) you may still be susceptible to relatively high interest rates.   

Housing Market Trends

As for real estate market trends, it can be tough to know what’s in store. Some real estate experts predict the continued reduction of home prices as interest rates hold steady, while others see limited housing supply resulting in sustained high prices.8 What’s more: These experts predict homes will likely sit on the market longer, testing the mental fortitude of sellers and the sales acumen of their realtors. 

The Interest Rate Workaround: Truehold’s Sale-Leaseback 

With house prices and interest rates both holding steady at a relatively high-water mark, homeowners are in a bit of a tricky spot. Sure, they can sell for a profit, but they’ll only find themselves on the other side of the table saddled with potentially sky-high interest rates. On the other hand, they can ride out the “storm,” trading what could be a record-high sale price for the comfort of a lower interest rate. We’d call it a catch-22 if there wasn’t a better way. 

Through Truehold’s sale-leaseback agreement, homeowners can sell their properties at market value, then continue to live in the house they’ve made a home. You pay rent, we cover major home repairs and property insurance and nothing changes –– except you’ve unlocked decades worth of hard-earned equity. 

It’s impossible to know what the future of the housing market will yield. But if you want to take a step toward the future you’ve dreamt of today, request the free Truehold Info Kit to learn about unlocking your home equity debt-free. 

Sources:

1. Investopedia. How Central Banks Affect Interest Rates.https://www.investopedia.com/ask/answers/031115/how-do-central-banks-impact-interest-rates-economy.asp

2. U.S. News. The Hottest Housing Markets in the U.S. https://realestate.usnews.com/real-estate/housing-market-index/articles/the-hottest-housing-markets-in-the-u-s 

3. Rocket Mortgage. Historical Mortgage Rates. 1971 to the Present. https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-fixed

4. Lending Tree. More Than 4 in 10 Millenials Refinanced Over the Past Year, Almost Double the National Average https://www.lendingtree.com/home/mortgage/refi-facts-and-myths-survey/ 

5. Congressional Research Service. Fiscal Policy: Economic Effects. https://crsreports.congress.gov/product/pdf/R/R45723/1

6. Redfin. U.S. Housing Market Overviewhttps://www.redfin.com/us-housing-market 

7. Nerdwallet. Current Mortgage Interest Rates. https://www.nerdwallet.com/article/mortgages/current-interest-rates 

8. Bankrate. 2023 first-quarter housing trends: A slower-than-usual markethttps://www.bankrate.com/real-estate/housing-trends/#projections 

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