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Interest rates are going up, which means real estate is getting more expensive. So what’s going to happen - will prices decline as rates go up? Or is it better to buy more rates just get more expensive? Add me on Instagram/Snapchat: GPStephan
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Interest rates directly affect how expensive it is to own real estate. As interest rates rise, your affordability goes down since that same loan becomes more expensive. Historically, us “freaking out” about higher interest rates is rather comical. In the 1980’s, the fixed 30-year mortgage rate was 18%. By the 1990’s, it fell to about 10%…and since then, it’s steadily decreased. So what about real estate prices at that time, how did they fare when interest rates were 18%?
Well, the surprisingly - it didn’t have much of an impact on prices. Development began to halt as borrowing became too risky for new projects, but dwindling supply kept prices rather intact. And historically speaking, interest rates have very little direct impact on property values…and the reality is that there are many other factors at play which determine the value of real estate. One interesting note is that usually interest rates are increased in either an improving economy, or to combat rising inflation.
In an improving economy, people tend to be doing better as well - unemployment is lower, wages are increasing, people make more money, people spend more money. This bodes well for real estate prices as people have more discretionary income.
If interest rates are increased to combat rising inflation, because real estate is a hard asset that typically increases in value at the same rate as inflation due to build costs also going up, sometimes the increase in property value from inflation actually outweighs any potential negative decrease caused by rising rates, and the net result can be positive for real estate.
And as they say, when it comes to real estate, it’s location location location…a bigger determination of prices is still the age old supply and demand. Local market health is a much stronger indication of market price versus interest rates alone.
My prediction is that we’ll continue to see upward pressure on real estate prices, even as interest rates slowly rise. Now the FED isn’t so stupid as to raise rates an absurd amount as to shock the market, they’ll do so in small, easy to swallow increases where it’s more like sitting in a simmering pot vs being tossed in a boiling vat of water. It’ll be so gradual that we’ll barely notice it over the next few years.
So with that said…historically, no, rising interest rates have no correlation on real estate prices - even though, you’d think it would. But rising interest rates are more of an economic symptom of a healthy market, than the direct cause of that. So for anyone out there like me who was curious or concerned about this…probably no need to be concerned. Buy what you can afford, buy with the intention of keeping it long term…and hold.
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