How High Interest Rates Affect Housing Market

This guide covers how skyrocketing interest rates affect housing prices going into 2025. When it comes to the current housing market, no one can, without absolute certainty, predict the values of homes. In many parts of the country such as many parts of California and Florida, home prices are skyrocketing, and homes are selling the minute they become listed. However, nobody has a crystal ball on where home prices are going.  Alex Carlucci, a senior loan officer and an associate contributing editor of Great Content Authority Forums says the following about interest rates:

Things that go up can easily come down and vice versa. What does the near future hold with home prices? Are home prices going up, or are they going down?

While financial analysts and industry experts can forecast events by using past data, they cannot be certain of future outcomes. With that said, there is much speculation on what the Federal Reserve is going to do to interest rates in 2025. Interest rates are a great indicator of housing purchases. In this article, we will discuss and cover the all-time high in interest rates and how it affects the housing market.

How Interest Rates Will Be Affected with the Election of President Donald J. Trump

Many potential home buyers are concerned whether will interest rates rise in 2025: According to Freddie Mac, interest rates are likely to go up to at least 8% by the year 2025.

Will Interest Rates Rise In 2025 With Job Growth

It’s no secret that the US job market is tied to the housing market.

• The Federal Reserve Board has indicated the fast job growth, and the hot economy will definitely not slow them down in increasing interest rates

Additionally, the Federal Reserve does not historically raise interest rates right before an election, but it seems like it will do prior to the 2026 mid elections.

So Should You Buy a House Now or Later?

Interest rates has remained at historical lows for over half a decade and never in history has interest rates been as low as it has been for so long: The Great Recession of 2008 crushed the housing market. Many homeowners who had equity in their homes and relied on that equity for their retirement saw their equity diminish literally overnight. Millions of homeowners saw their mortgage balances higher than the value of their homes. Dale Elenteny, a senior loan officer and an associate contributing editor of Great Content Authority Forums (GCA Forums), says the following:

Some decided to bail on their homes because they could not sell their homes. Others whose mortgages were upside down

Many homeowners never ever dreamed that they would ever see the daylight of their home value ever-increasing. They took it for granted that they were stuck in their homes for the rest of their lives. Areas of Florida, California, and many other parts of the United States have seen the value of their properties plummet more than 50% in value.

Recovery of the Housing Market and Shortage of Housing

Fortunately, starting in 2010, the housing market slowly started to recover and by 2013, home values in many parts of the country such as Florida and California were skyrocketing by double digits every year: Many potential home buyers were on the sidelines to see if interest rates will fall further. However, while waiting, home prices were appreciating. Many who were eyeing on a certain type of home have missed the opportunity to purchase that home. Many areas of Florida such as the following:

• Miami-Dade County
• Broward County
• Palm Beach County
• Homes are selling the minute the home is listed on these particular counties of Florida on the MLS

Will Interest Rates Rise Despite Rising Home Prices?

If you are going to buy a home, now is the time. Interest rates are still reasonable. Market prices are still well below 2008 trends, prior to the bursting housing bubble. While inventory remains low, buyers are still in a great position to negotiate good terms on a home purchase.

About The Author of How High Interest Rates Affect Housing Market

Alex Carlucci is a licensed loan officer with Gustan Cho Associates. Alex is a contributing associate editor and writer with Gustan Cho Associates. Alex is armed with decades of accounting and finance knowledge.

• Alex Carlucci has an MBA and a Master’s Degree in Accountancy
• He has advanced knowledge of business taxation
• Alex’s passion is helping others and being armed with her extensive accounting experience and being an expert in real estate and finance
• Alex is a senior member with Gustan Cho Associates
• He is a full-service mortgage banker specializing in FHA Loans, VA Loans, USDA Loans, Conventional Loans, FHA 203k Loans, Reverse Mortgages, Jumbo Mortgages, Non-Conforming Loans, and Commercial Loans
• Alex’s specialty will be originating mortgage loans with no lender overlays.
• Mr. Carlucci works for a five star national full Eagle Fannie, Freddie, Ginnie Mae Direct Lender licensed in multiple states
• Gustan Cho Associates has no overlays and a policy to close loans in 21 days

FAQs: What Impact Do High Interest Rates Have on the Housing Sector

• How Do Housing Markets Respond to Changes in Interest Rates?
• Interest rates tend to affect the housing markets by:

Mortgage Payments

• With an increase in interest rates, mortgage rates are increased;
• This leads to an increase in homeowners’ monthly repayments.

Home Affordability

• Increased interest rates decrease the purchasing capacity of would-be homeowners.

Home Prices:

• Which in turn decreases the demand for these homes.
• In turn, demand for homes would decrease.
• This means home prices tend to stay the same or decrease.

What Are the Impacts of High Interest Rates for First-Time Homebuyers?

Due To the Following Reasons, First-Time Homebuyers May Be Affected by the High Repaying Interest Rates:

• Monthly repayments towards mortgage are larger, making buying a house less affordable.
• The amount that they can loan is restricted.
• Other buyers already facing inflation and high home prices are again discouraged from buying.

Do High Interest Rates Affect How Much a House is Sold For?

Yes, in case of maturity of interest rates, it does lead to houses being sold for a lower price because:

• The amount the buyers are willing to spend is lowered.
• Making competition in the housing market fierce.
• In a more gradual housing market, sellers would be forced to price their houses lower to entice buyers.
• However, such price fluctuations would depend on the inventory of available housing units and the regional demand.

What Are The Trends Regarding Mortgage Approvals and High Interest Rates?

Increased Risk:

• Some lenders will tighten their approval conditions.
• Lenders tend to adopt this policy to avoid exposure to risk in a changing market.

DTI Ratios Tend to Worsen:

• Increased situs mortgage payments can suffocate the debtor’s DTI ratios to be pegged to disqualification from the remedy.

Adjustable-Rate Mortgages (ARMs) Remain Expensive:

• ARM features initially low rates.
• However, most risks will be associated with this option in the future.

In Periods of High Interest Rates, What Occurs in the Housing Inventory?

Reduced Inventory:

• Homeowners with the old mortgage who receive low interest in the new mortgage are reluctant to sell and upgrade, resulting in a cut in the number of houses on the market.

Builder Activity:

• High rates may hinder new home construction independent of builders’ purported determination to achieve this goal.
• More stringent financing terms further reduce construction activity.

What is the Combined Effect of High Interest Rates on Real Estate Investors?

• Increased rate hike = little borrowing = more expensive investment property financing.
• Decreased demand also influences rental returns and indices of appreciation at the property.
• Increased reliance on cash deals = higher cost of borrowing.

At What Level or Rate Are Interest Rates Considered High for the Rental Market?

• High interest might imply greater demand for the rental market.
• If it is affordable to buy a home, potential buyers might wait to buy it.
• Landlords may consider increasing rent in case of rising demand.

Is There Any Positive Outcome Due to High Interest Rates in The Housing Market?

Prevention of Escalation:

• With higher rates, burning hot markets would be cooled off, and running prices would stabilize.

Favorable Deals:

• Adequate room for negotiation may be available to the buyers as reluctance grows for bidding.

Saves Encouraged:

• Higher rates encourage the range of potential buyers.
• This is because they can save to make a larger down payment.

How Do or What is The Consequence of Sellers on High Interest Rates?

Less Traffic:

• Sellers will have a greater waiting time when listing and fewer offers.

Time To Cut Prices:

• Buyers may need a down price cut to obtain sellers.

Hurdles To Move-Up Sellers:

• People intending to sell and buy a new place would think twice due to the high rates on their new mortgage.

What Types of Loans Are Most Impacted by the High Interest Rates?

Fixed Rate Mortgages

• These gain the greatest impact as the interest rise increases the cost of borrowing.

Adjustable-Rate Mortgages (ARMs):

• These kinds of loans are appealing at first.
• However, as the interest rate increases, they may become riskier.

Non-QM Loans:

• These would have further interest rate rise.
• As these are based on unconventional risk borrowers.

How Would High Interest Rates Pan Out Concerning Home Financing?

• The takeout volume of rare financing typically is low in times of high interest rates.
• Borrowers with low fixed-rate mortgages are less likely to refinance except when a cash-out refinance is observed.

Wouldn’t High Interest Rates Cause The Housing Market to Crash?

• No. Sure, streamlined refinancing can be detrimental to the market.
• Still, a crash needs a lot of extra elements, such as:
• Development of a large surplus to a high mortgage default ratio.
• Rapid decline in home values.
• Similarly, the housing market today is characterized by tighter credit and low prices, making the 2008 scenario unlikely.

How Would The Buyers Function in a Situation With High Interest Rates in The Housing Market?

ARMs or Buydowns:

• These provide sizeable payments that can help reduce the money owed during the initial stages.

Negotiate With the Sellers:

• Buyers can better maneuver by negotiating closing costs.
• Or asking the seller to accept lower prices.

Focus on Affordability:

• Shop around market rates for more realistic target budgets.
• Explore sources of down payment assistance.

Looking At High Interest Rates, What Can Sellers Do?

Have Sellers Mentally Set Their Pricing Habits:

• They should gather enough information about the market.
• Set a price for their home based on the current market.

Be Patient When Anticipating Longer Weather:

• Prepare for longer market waiting times.

Boost Buyer Confidence Through Incentives:

• Consider paying for closing costs or, going a step further, buying the buyer’s rate.

Seconds Into Minutes, It Still Fights Like a Champ:

• Regardless of the rate that fuels the fight, bigger areas will never lose hope, even if it’s slower.

Affordable Markets:

• More buyers may be willing to venture into cheaper markets and leave the higher-cost areas.
• We have more buyers coming into the market looking for affordable regions.

Rural Areas:

• If these already have a low level of competitiveness, they will be less affected.

Will Interest Rates Start Decreasing, And How Does That Imbalance The Market?

If rates go down, it normally brings out the buyers. Still, there’s also an additional factor where competitive market conditions make buyers scarce. Prices may start to go up again.

It isn’t easy to time the market. Therefore, buyers and sellers need to make decisions based on their circumstances at a given moment.

As long as one understands the impact of high interest rates, any housing activity, whether buying, selling, or investing, can be carried out in this environment. Proper planning and making smart decisions can reduce the problems posed by increased rates.

If you have any mortgage lending questions and are considering a Home Purchase and like to go over case scenarios and know more about the area, feel free to contact Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.

This BLOG On Will Interest Rates Rise Was UPDATED on December 25th, 2024.