Does Rising Interest Rates Decrease Home Prices?

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Rising Interest Rates

The housing market has been tumultuous in the past three years. After the pandemic-spurned seller market took hold for nearly two years, we’re starting to see a shift that concerns both buyers and sellers.

We’ve seen a massive increase in mortgage interest rates in the past year. Interest rates hovered around 3.22% in 2021 for a 30-year fixed mortgage, and now, at the start of 2023, they’re over 6%.

What do rising interest rates mean for home prices? What does the buying power look like in this current real estate market? Can buyers still find affordable mortgage rates?

Read on to learn more about the connection between increasing interest rates and decreasing home prices.

How Do Rising Interest Rates Affect Buying Power?

Buyers have already faced limited options and rising home prices in the past two years, thanks to high demand and low supply. Now, buyers are facing a new hardship: rising interest rates.

When interest rates rise, so does the amount of money owed on a mortgage, even if that loan covers the same dollar amount from one year to the next. For example, monthly payments for a $250,000 mortgage with a 3% interest rate are going to be just over $1,000. Increase that interest rate to 6%, and those monthly payments are now just under $1,500.

This affects the purchasing power that buyers have. Historically speaking, most workers will not see a substantial raise in the face of widespread inflation. In this current economic climate, many buyers will discover that they’ve lost up to $165,000 in buying power.

Will Home Prices Decrease in Response to High Interest Rates?

Rising interest rates don’t impact buyers alone. They can also impact sellers, though not in the way you might expect.

Rising interest rates tend to converge with high inflation, which means that the cost of living is going to increase. For example, if inflation is at about 7%, something valued at $100 will increase to $107. Of course, on a much larger scale, that 7% is going to make a massive difference, and it’s not uncommon to see sellers raise their prices in response to inflation.

However, thanks to rising interest rates, this trend is not sustainable. Rising interest rates force a lot of buyers out of the market, which means that competition drops and houses that may have been purchased quickly will sit on the market for weeks and even months. In the face of this pressure to sell to unwilling buyers, many sellers will begin to drop their asking price.

Learn More About Your Home Purchasing Options

This is a tough time for both buyers and sellers. Rising interest rates make once-affordable properties unaffordable for buyers all over the nation. With a decrease in buyer interest, many sellers are forced to lower prices, which may not be enough to counterbalance rising interest rates.

What are your options if you’re hoping to purchase a home soon? At Mortgage News Channel, we’re here to help. Contact us to speak with a loan consultant and have all of your pressing questions answered.

At 7th Level Mortgage, we are an experienced team of mortgage professionals based out of New Jersey and serving the east coast from Pennsylvania to Florida, including Delaware and Maryland. We have won numerous awards for our excellent professional work and reputation with clients for being extremely diligent, accessible, and hands-on throughout the entire mortgage process.