Explaining Rising Interest Rates and Real Estate to Sellers

Elliot Adler

As a home selling agent, it’s vital to understand rising interest rates and how they affect your client’s real estate goals. This will help explain how to approach the market and calm their apprehensions.

High-interest rates can impact several factors, including affordability, equity building, and risk. These factors can affect your client’s buying and selling decisions and how much they can afford to spend on their new home.

Increased Affordability

While homebuying has become more expensive due to the recent interest rate spike, it’s still more affordable to rent than in many metro areas. It’s even more so in the big dogs like Chicago, Honolulu and New York.

A 1% rise in rates can equate to about 10% less of your monthly budget going towards your mortgage. In a crowded market, this can have a significant impact on the bottom line.

While it’s hard to predict what will happen in the next few months, there are plenty of reasons why buying is still a smart move for most people. It can be a great way to start a family, save for a down payment or even build equity in the long run. But it’s important to take note of the pitfalls of making this major financial decision and consider whether it’s the right time to invest in a house.

Increased Equity Building

When interest rates rise, several asset classes react differently. Rising rates erode the value of bonds, affect the price of stocks and influence interest payments on debt.

Real estate investments respond well to this trend and have a history of performing better than many other assets in expanding economic environments. That said, rising rates could negatively impact several development-related projects as developers try to secure financing to build more homes.

As a home-selling agent, you can use this to help your clients profit from the increased equity in their existing homes. Whether through a sale, refinancing or taking out a home equity line of credit, you can help your client use the money to increase their down payment on a new home.

Increased Risk

As interest rates increase, real estate becomes less affordable, and housing sales slow. The effect isn’t permanent, but it can be disruptive.

Despite the potential for a negative impact on home selling, rising interest rates will positively impact rental properties. As fewer buyers looking to buy, rents will rise, helping owners solve their vacancy issues and improve their cash flow.

For developers, rising interest rates may make financing projects more expensive. This is bad news for many real estate deals, especially those that would have been viable with low-cost debt in the past.

Inflation is traditionally a friend to real estate, and we’ll see if it’s still so with higher rates and the looming threat of recession. However, there are counterbalancing concerns that can’t be ignored in this changing environment. These include structural changes, inelastic demand, and the emergence of new market-specific factors that could shift investor risk.

Reduced Demand

When interest rates rise, the ability to purchase a home decreases, reducing the housing demand. This decrease in demand can drive down home prices.

The housing market can also decline if new construction slows down due to rising costs and delays in the construction process. Real estate developers can also lose sales due to the lower demand.

Historically, interest rate increases have impacted real estate prices, but each developed economy’s path of future inflation is unique. Nevertheless, rising inflation may be a good time to buy real estate assets.