Regarding real estate, interest rates play an essential role in the market. Even the slightest variation can significantly change the current state of the real estate market. We all want an interest rate of 0.1%, but reality hits us differently. The increase in interest rates has escalated to alarming levels, which were impossible to imagine a couple of years ago. However, not everyone understands the significant changes that the variation in the interest rate figures means.
Is rising interest rates that serious? The short answer is yes. Buyers and sellers alike are facing the highest interest rates since 2008. But why is this? In the following lines, we will explain what the increase in interest rates means for you, the average buyer/seller, and how you might want to deal with this situation in your real estate investments.
How do rising interest rates affect buyers?
A declining purchasing power always accompanies rising interest rates for the average buyer. For example, if you want to buy a house worth $500,000, you'll most likely apply for a mortgage, so you don't have to pay the $500,000 upfront. At current interest rates, you'd notice a moderate short-term impact. While in the long-term, the total debt of your mortgage would rise considerably.
So, the more interest rates increase, the more difficult it becomes to buy a home. It also detours people from adding to their real estate investment portfolios. At the start of the pandemic, in 2020, it was common for agents to receive bids for 10-15% more than the price listed, there was a lot of demand and little offer, but today things have changed.
The buying force has collapsed over time, and the real estate market has begun to feel that effect. With rising interest rates, investors are deciding to hold and the average buyer sees purchasing power decrease daily. In 2022, online searches for property for sale have decreased, as well as buyers' interest in acquiring a new property.
Although experts foresaw that the buying force would remain until the beginning of 2023, the truth is that the rising interest rates, added to the growing inflation, have set the perfect storm for the real estate market.
However, there is still a light at the end of the tunnel. Buyers' frenzy seems to be maintained despite the rising interest rates, which promotes price competition to acquire a property. Although the average buyer is having a hard time staying in the game, thousands of buyers can still afford more attractive bids for sellers.
How do rising interest rates affect sellers?
Sellers are not exempt from the difficulties the rising interest rates have brought to the real estate market. As interest rates increase, the number of buyers who can afford to buy these properties is less.
Let's say that a home is worth $500,000, and with an interest rate of 3%, there are ten buyers interested in the property; however, with the increase in interest rates up to 6%, that number of buyers is diminished to half, or even less. This is due to the lower purchasing power, which results in fewer bids for the seller, who is forced to accept a less lucrative offer for fear of being unable to sell the property.
For example, houses for sale in Chelsea, a highly sought-after New York City neighborhood, have always been synonymous with luxury and sophistication. Historically, buyers have competed with each other with bids above the listing price to acquire property there. However, this trend has been reversing in the last months due to interest rates, making the selling process more difficult.
By decreasing demand, the market slows considerably, causing a domino effect that seriously hits prices, offers, and decreases housing supply over time. The only solution to this frenzy of rising interest rates depends on certain conditions that relieve the real estate market.
What about rental properties?
Rising interest rates have a negative impact on sellers and buyers; however, the rental market benefits considerably from this situation. With a higher interest rate, buyers don't have the purchasing power to buy a property, but they still need to fix their housing problem. This is when rental properties become a lifesaver for these buyers. Investments in rental properties become highly profitable when the market faces rising interest rates.
Buy or sell?
Although the situation seems alarming, there is no need to fear a real estate market collapse; nothing is further from reality. Although current interest rates have been considered high for the last decade, they are far from reaching historic levels. In 1986 the mortgage rate reached 10.19%, so the current figures are still considered viable for the real estate market.
As buyers or sellers, it is stressful to see daily news about the collapse of the economy and the crash of the real estate market. It is necessary to remain calm and carefully analyze each step we take to safeguard our assets and our investments. If you are a buyer, do not limit yourself to a single property; take the time to search the market and find the property that best suits your economic capabilities. You can usually find a great property without getting into a bidding war with other buyers.
On the other hand, if you are a seller, you should value each of the bids you receive for your property; impatience will only lead you to make mistakes. Although rising interest rates make you think that you will lose money, the truth is that your property is a valuable asset in today's market, so you are more likely to obtain an excellent ROI than lose money.
If you are interested in the Chelsea real estate market or looking for homes for sale in Chelsea, contact the Mackay Dixon Team. Our expert agents are qualified to provide you with top-notch advice and help you in the process of buying or selling your home in New York City and its surrounding area. The Mackay Dixon Team comprises a select group of realtors with essential knowledge of real estate in New York City and can help you make the best decision for your real estate investments.