How the Economy Affects Home Values in the Real Estate Industry
Your average 30-year fixed mortgage rate in the United States sits at around 6% in early July. However, that rate is expected to spike another 75 basis points if the Federal Reserve raises interest rates higher to combat inflation.
What does that mean for the real estate industry, home values, and the economy? The answer to those questions is complicated, but if you think it’s all bad news, that’s not true. There’s good news there for sellers and buyers, as well as some words of caution.
In general, sellers can still move their properties for a substantial profit without seeing those pandemic bidding wars.
Meanwhile, buyers that are paying more for their mortgages are finding homes with less inflated home values. This trend is expected to continue as interest rates rise for their loans.
In the following article, we’ll discuss how inflation and home prices impact home buyers and sellers.
Real Estate Industry in Flux
Anyone that remembers 2008 and the real-estate downturn knows that the cycle of buying and selling can make a sudden turn.
While nothing like that historical change is on the horizon, the boom period of a few months is over for the time being since the spike in interest rates to combat inflation.
The good news for sellers is that although many people looking to buy have to weigh hefty payments due to these higher mortgage rates, there is still limited inventory across the country.
Basic supply-and-demand principles dictate that limited supply allows higher prices to satisfy the demand.
Why Does Inflation Matter?
Inflation is the percentage increase you pay for goods over time. The most recent numbers had the U.S. inflation rate at around 8.6% for goods and services.
There are several factors in play with our current inflation woes. Among them are lingering supply chain fulfillment issues, pandemic cash awash in the economy, and higher fuel prices.
These fuel prices have dipped recently, but Russia’s incursion and the free world’s subsequent embargo of the authoritarian regime’s energy exports have forced the European Union and other NATO allies to look to other sources for petroleum and natural gas.
In one way, this benefits the U.S. because we are exporting more fuel to Europe, but it also drives up fuel prices (and the price you pay at the store) domestically.
To fight inflation, the Federal Reserve’s principal tool is raising the interest rates to cool the economy and reduce consumer demand until inflation subsides.
What These Rates Mean
If interest rates are up, then your mortgage will cost more. This means the monthly payment you pay for a home has gone up. However, that’s not all bad news.
To make homes worth buying, sellers must offer a product worth the price. This means homes must be in good shape to demand higher prices.
Also, sellers still enjoy multiple bids, but not the bidding wars that plagued the pandemic and forced buyers to cough up unrealistic prices for homes that didn’t appraise.
In the long term, these realistic prices and quality homes will stabilize the housing market.
Ready to Make a Move?
Reading the tea leaves of the real estate industry is a full-time job. That’s why you shouldn’t do it alone. Instead, you should call our experts to help you navigate these higher interest rates and the broader economy.
Are you ready to buy or sell? Contact us today to talk to a real estate professional.