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Rising Interest Rates Impact on the Market

Home Sales Dropped Due to Large Portion of Buyer Pool Being Priced Out

Over the past few months, rising interest rates have made homes more expensive for buyers, thereby reducing the demand for home purchases. As a result, sales have declined and home inventory has increased. In the current climate, home buyers should expect home prices to continue to rise gradually, which will keep the supply of homes in the market low and keep home prices high. 

However, as the 30-year fixed-rate mortgage average crossed 5.23%. Buyers have become hesitant to borrow money to purchase a home. 

Home Inventory Increased

As home sale declines, we are expecting an improvement in the supply of homes in the market. According to NAR, in June 2021 we had 3.9 Months Supply of New Houses in the United States. Where as now, June 2022, we have 9.3 months supply of new houses in the U.S.

Though this may signify an improvement in the housing supply, it is still considered to be at a sluggish pace. With this, we may expect home prices to still gradually rise in the coming months if supply could not cope up with demand. 

Property Value

Property value in the real estate market is currently correlated to interest rates. When interest rates are higher, property values are also higher. Over the past few months, rising interest rates have made homes more expensive for buyers, thereby reducing the demand to purchase homes. For every 1% increase in mortgage rates, 18% of the potential buyer pool will be priced out of the market. 


Bottomline

The Fed increasing the interest rates has greatly impacted a lot of people. The Fed’s way to cool-off inflation is by rising interest rates which has resulted in higher inflation hikes than expected. This has catapulted businesses and markets to shrink down spending abilities. However, shedding some light into this situation is the slow recovery of the labor market to the pre-pandemic levels, this is great news for the country’s economic stimulation. 

The real estate market on the other hand shows its strength amidst the crisis, property price appreciation and average equity gains has continued to grow year on year. Data shows that the state of Utah is among the top states to have the highest average equity gain (yoy) at $92,000 just next to California and Hawaii. Keep in mind that for every 1% rise in interest rates, you as a buyer lose 10% of your purchase power. Thus making it virtually impossible to “out save the market”, if prices and rates both continue to climb upwards. However if we do see home prices dip to try and correct the rise in rates, remember that you are paying more to your borrower instead of towards your principle loan. Every situation is different, to see what makes the most sense for you and your family reach out for a one-on-one wealth consultation.

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