What agents need to know about the impact of interest rates on the real estate market

Few things affect the real estate market more than the rise and fall of interest rates, which has a ripple effect that directly influences everything from buyer behavior to market trends.

Lower interest rates make mortgages more accessible, paving the way for more buyers into the market and potentially resulting in increased demand and higher prices. Rising interest rates, however, mean higher mortgage payments, and can dampen buyer enthusiasm or affordability, slow down sales or lead to dropping home prices.

As a real estate agent, it’s essential to stay aware of significant changes in interest rates and how they may affect market conditions so you’re better equipped to advise your buyers and sellers on everything from housing affordability to availability.

The Federal Reserve

When your clients express concern about interest rates, they’re likely referring to the larger-scale changes with long-term effects that are tied to the Federal Reserve (“The Fed”) and its monetary policy. 

The Fed’s primary objective is to promote a strong U.S. economy through full employment, stable prices and moderate long-term interest rates. The Fed’s Federal Open Market Committee (FOMC) meets eight times a year to review current and predicted economic conditions and may adjust their policies accordingly. Generally, the Fed will adjust its lending rate by a quarter percent, but at times the adjustment has been larger.

To lower inflation, for example, the Fed may raise the federal funds rate, which tends to lead to higher interest rates throughout the economy, including mortgage rates — or they may lower rates, as they did when the Great Recession began in 2008. Back then, the FOMC lowered the rate to near zero, where it remained for several years.

Remember that mortgage lenders base their rates for fixed- and adjustable-rate mortgages on the Fed’s interest rate, and a rise or fall in interest rates will affect your clients differently.

How interest rates impact your clients

Buyers: Rising rates can shrink buyers’ borrowing power, forcing them to adjust their budgets and potentially target lower-priced properties. A buyer who might have qualified for a $400,000 mortgage may now qualify for a $350,000-$375,000 mortgage when interest rates rise. Buyers who still qualify for their target home loan might decide to look for smaller or more affordable properties in order to maintain their monthly housing budget. This can lead to longer listing times and increased competition for affordable homes, particularly if inventory is tight.

Lower rates can have a positive effect on housing affordability and motivate buyers who previously felt priced out. In particular, first-time homebuyers who were waiting for the right time may feel motivated to move forward to lock in low interest rates. Lower interest rates tend to create a more dynamic and competitive market for buyers and often result in an eventual rise in home prices. 

Sellers: Rising interest rates result in a decreased demand for homes and sellers may be facing a smaller pool of potential buyers. Lower demand means that homes often sit on the market longer than usual. Sellers may have fewer offers, and they may need to adjust their pricing and be prepared to offer concessions to attract buyers. Sellers should consider that when they sell their current property, they may have difficulty finding their next home as interest rates rise due to limited inventory and the higher cost of securing a mortgage.

Declining interest rates, on the other hand, create more buyer demand and attract a wider pool of buyers. High demand can drive up sale prices and lead to shorter listing times, giving sellers more negotiating power. Sellers looking for their next home can take advantage of lower interest rates when they purchase their next house, too.

Homeowners: Depending on the type of mortgage they have and their financial goals, rising or falling interest rates will affect homeowners differently.

During periods of rising interest rates, homeowners with a fixed-rate mortgage can be certain their payments will remain steady at the lower interest rate they locked in at the time of the loan. However, there could be some fluctuations in housing expenses due to changes in taxes or insurance.

On the other hand, homeowners with an adjustable-rate mortgage can be fairly certain that their payments will go up when their interest rate is due for adjustment, although how much it goes up depends on mortgage caps specific to the terms of their loan. Refinancing into a fixed-rate mortgage may provide stability and consistency, although homeowners should be prepared for tighter lending restrictions.

Declining interest rates present other opportunities for homeowners. For example, if a homeowner’s current interest rate on a fixed-rate mortgage is significantly higher than current rates, refinancing can offer potential savings through lower monthly payments, especially for those struggling with affordability.

Lower interest rates can also make borrowing against home equity more attractive, allowing homeowners to access cash for renovations, debt consolidation or other financial goals.

Adapt your strategies for success