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What impact will rising interest rates have on the housing market?

07/08/22 – Caleb Hanson

Different groups will experience climbing interest rates differently. Per Macrotrends, the average interest rate on a 30-year fixed loan for a home purchase rose from a low of 2.67% in December of 2020 to 5.7% in June of 2022. That’s a huge shift, and here’s how we expect first-time buyers, move-up buyers, cash buyers, and homeowners will experience the change.

One of our first-time-buyer clients was recently quoted 5.675% as the best available rate with nearly perfect credit after being quoted 4.375% a few months earlier. They were hoping to keep their total monthly payment to $3,000 per month or less, which meant they could afford a maximum of about $475,000 in their target area a few months ago. Now that’s dropped to about $430,000 if they want to keep that same total monthly payment. Unfortunately, that means they can offer less on the homes they were originally considering or pivot to considering smaller homes or less expensive areas.

Move-up buyers who are selling a home to purchase another home are experiencing a similar decrease in purchasing power. However, their situation is easier because those with more cash are less impacted by interest rates. They are usually borrowing less money, so an increase in the price of renting money doesn’t hurt quite as much. Move-up buyers generally have enough equity in their current homes that they can make a larger down payment on purchasing their next home compared to first-time buyers who are often putting 5% or less down.

Cash buyers gain more advantage as interest rates rise because the higher interest rates create downward pressure on home prices. Since buyers using loans to help them buy a home are shopping based on a monthly payment, they’re forced to lower their maximum purchase price when interest rates rise. However, cash buyers can still afford exactly the same prices as before, which means they can potentially buy better homes for the same price or get the same home for less money as price competition from buyers using loans weakens.

Homeowners can most likely expect appreciation to slow down amidst rising interest rates, and refinancing an existing loan may not be as attractive now as it was in the last few years. You can always find our latest review of Southern California market trends here:

Southern California Real Estate Market Trends

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