What You Need to Know about the Rising Interest Rates in the Real Estate Market
- Posted: June 30, 2022
- Posted by: Travis Lynk
- Last Reviewed: July 1, 2022
The real estate market is a commercial playground that is controlled by numerous factors in unison. If you are not supported by sufficient information and sound advice, you will surely lose your way. One of the major objects of speculation since 2021 is the rise of mortgage interest rates. In 2022, average mortgage rates in the United States seem to be at a historic low, even though they have risen from around 3% in December 2021 to over 5% in May 2022. Many have been left to wonder how this will impact the real estate market as a whole. Let’s look at a few consequences of these rising interest rates.
Interest Rates and Mortgages
When you borrow a sum of money from a financial institution, you are expected to pay an excess amount of money to the institution in addition to repaying the amount borrowed. This excess amount is considered to be the cost of borrowing the money and is known as interest. Usually, interest is calculated as a percentage of the loan taken and depends on a number of factors such as the type of loan, the time period of the loan, taxes, and insurance. It is paid in regular intervals at a rate decided by the financial institution.
A mortgage is a long-term loan whose specific purpose is to aid the borrower in buying a house. As with any other loan, you have to pay back a mortgage with interest, and the home you buy and the land around it are assets that serve as collateral. You can acquire a mortgage from a wide range of lenders, including commercial banks, thrift institutions, mortgage loan companies, and credit unions. Along with the down payment made while buying the house, the mortgage and the regular interest payments make up the total cost of the house.
Effects of Rising Interest Rates:
The fluctuation of mortgage interest rates sends a ripple down the entire real estate market, which in turn affects the entire economy. Rising interest rates affect different players in the market in different ways.
Effect on Homebuyers:
From the perspective of a homebuyer, an increase in mortgage rates means that the cost of owning a home will be higher. This also means that affordability decreases as a larger part of the buyer’s income will be used to buy the home. Thus, the pool of prospective homebuyers decreases. However, this will not be the case if the economy is strong and the increase in interest rates is coupled with an increase in salaries and wages, thereby compensating for the increase in expenditure.
Effect on Sellers:
Rising mortgage rates affect sellers too, but in a completely different way. Since the number of potential buyers reduce, sellers have to list their homes at a lower price in order to keep them affordable for more buyers. This results in sellers making less profit when they eventually sell their homes as the market value of their property drops. Ultimately, if interest rates were to grow very rapidly, then the housing market would likely collapse.
Effect on Property Values:
There is a strong correlation between property values and mortgage rates. As mortgage rates increase, prospective buyers will defer their home purchase, therefore the demand for houses will decrease. This can cause an oversupply of houses. Since one of the key elements that determines a house’s property value is the number of competitors, this oversupply diminishes the property value as fewer buyers compete to buy the same house.
Effect on Investors:
Rising interest rates also affect other sectors, including investors, in different ways. When mortgage rates go up, cash returns go down for those who have a stake in leveraged assets and the prices of investment properties increase. However, an increase in housing loan rates may prove profitable for investors in rental properties. Since fewer people can qualify for mortgages, they will shift their focus on renting instead of purchasing homes until there is a rise in affordability.
Effect on Mortgage Companies:
For companies and banks that lend out money for home purchases, higher interest rates means more interest that the company earns, thus resulting in a higher accumulation of revenue. Nevertheless, rising interest rates do not always mean more profit as there may be a significant drop in the demand for mortgages, leading to a lack of business for the mortgage company.
In short, the rise of mortgage rates is a double-edged sword. At first glance, it may appear to impact the real estate market negatively, but if it is coupled with a strong and healthy economy, then it is nothing to fear. Finding the right mortgage is contingent on receiving the right advice. If you are looking to buy a home in Puerto Rico, feel free to contact our PRelocate team any time for more information. You can also browse our current real estate property listings if you are thinking about buying or renting property.
Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the “Materials”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.