The real estate market has been hot for the last two years due to historically low mortgage rates. In an effort to curb the increasing home prices and shield the economy from the negative impact of rising inflation, the federal government has decided to gradually increase the key lending interest rates. The increase in interest rate is likely to disrupt the housing market with the shift of demand and supply but at a gradual rate.
The housing market has largely been a seller’s market as the low mortgage interest rates that the market has been enjoying increased the demand for homes from prospective homebuyers. However, the recent increase in mortgage interest rates is expected to lower home affordability as many homebuyers will not be in a position to absorb the high mortgage lending rates.
Interest rates for both fixed and adjustable mortgages have been adjusted upwards thus, reducing any option for cheaper mortgage financing for prospective homebuyers. Any increase in mortgage lending interest rates lowers the demand for homes for sale thus cooling the hot housing market as only a few prospective homebuyers can manage to service expensive mortgage loans.
Home prices are also expected to remain high despite the increase in mortgage interest rates as inventory remains low. The average price for a home in the U.S real estate market has now gone over $415,000 in April 2022 which is historic. When home prices are high, we expect the ease of homeownership to reduce gradually as many interested homebuyers would prefer to rent over own.
An increase in demand for rental homes will also mean that rental prices are likely to go up. In the coming months, the housing market is going to experience a sharp increase in rental prices and the situation is likely to continue until the economy recovers from the current high inflation rate and mortgage interest rates are reduced.
Other factors that are causing the rise in rental prices are the current shortage of rental units and strong labor markets. A change in demographic whereby the housing market is experiencing a lot of interest from millennials who want to be first-time homebuyers will keep the demand for homes high thus, keeping the market active though the crazy high demand that has been the norm is expected to cool down.
An increase in mortgage interest rates will definitely impact the housing market as it will reduce home affordability. The cost of repaying a mortgage loan will increase for new homebuyers more than ever before until the housing market gains stability though there is a lot of uncertainty.