Will rising interest rates lead to a “market collapse”?
Anyone who is watching the news lately is well aware that interest rates have been making dramatic moves. Not long ago, a home buyer could obtain a 30-year fixed mortgage in the low 3 percent range. As of the time of this article, CNN, NPR and other major news outlets have been reporting that interest rates are approaching, and on some days have even surpassed 5 percent.
What does this mean for the real estate market? Are we truly facing a market collapse? Some say yes and some say no. On the one hand, the sharp and rapid rise in rates will inevitably have an impact on demand as it directly affects affordability. The change in interest rates has caused the monthly payment for buyers to increase by 40 to 60 percent thus far. At this point many buyers are being forced to shop for homes in a lower price range than previously so that they can afford the monthly payment. It stands to reason that many buyers will be weary that interest rates will continue to increase and cause home values to fall. As a result they may want to pause their home search out of fear that they will be buying in a declining market.
The brighter outlook views the recent rapid moving rates as a temporary situation which will moderate in the medium term. Inflation and the Federal Reserve’s need to fight it through higher rates is the result of multiple geopolitical events (e.g. Russia’s war in Ukraine, supply chain issues), the Federal Reserve’s unprecedented accommodative monetary policy since the end of the Great Recession, and the Covid-19 pandemic. Many prognosticators view each of these sources of inflation as temporary. The Federal Reserve has begun to aggressively unwind their accommodative policies, life is slowly returning to normal as Covid-related measures are relaxed, and many believe that supply chain issues will begin to resolve themselves. All of those changes should help to moderate inflation, and help to reduce the risk that interest rates will rise significantly from here.
We believe that the current risk of a decline in home prices outweighs the likelihood that the move in interest rates moderates, at least in the near term (next 12-18 months). Many of the factors causing interest rates to rise are complicated, difficult to control, and will not be so easily resolved. For those homeowners who are still able to sell their home, now may be the best time to take advantage of home prices near their all time highs by selling before values adjust to a new reality of higher mortgage rates.
