How Interest Rates Shape the Real Estate Market

By Charles Dizon, Century 21 Real Estate Center – October 24, 2024

Let’s dive into something that impacts everyone in real estate: interest rates. They’re a big deal, affecting everything from loan affordability to housing demand to the overall economy. For anyone buying, selling, or investing, a solid grasp on how interest rates influence the market is key. And while the Federal Reserve plays a big role by adjusting rates, it’s rarely a straightforward cause-and-effect on mortgage rates—there’s a lot more to it.

The Link Between Interest Rates and Real Estate

1. Mortgage Affordability

Interest rates directly shape what people pay on mortgages, which translates into what homes they can afford.

• Low Rates: When rates drop, monthly payments do too, so buyers can often afford higher-priced homes.
• High Rates: Higher rates mean bigger monthly payments, shrinking buyers’ purchasing power and, in some cases, the number of eligible buyers.

2. Housing Demand

Interest rates also sway the level of demand in the housing market. When rates are low, buyers can finance homes more affordably, driving up demand and often home prices. On the flip side, high rates tend to cool things off by making loans more expensive and reducing buyer activity.

3. Real Estate Investment

For investors, interest rates are a deciding factor in the cost of financing properties. Lower rates generally attract more investment in real estate, as cheaper financing boosts potential returns. But as rates rise, the cost of borrowing climbs, and investment interest may start to taper off.

4. Refinancing Frenzy

When rates drop, it’s often an invitation for homeowners to refinance. Lower rates mean smaller monthly payments and can free up cash flow. Naturally, higher rates mean fewer folks jumping on the refinance train.

The Role of the Federal Reserve

The Federal Reserve—or “the Fed”—is a key player here. By setting the federal funds rate (the rate at which banks lend to each other), the Fed can either cool off or rev up the economy. But it’s important to note that while Fed rate changes influence mortgage rates, the connection is indirect and influenced by market conditions.

• Short vs. Long-Term Rates: The Fed primarily affects short-term rates, while mortgage rates are more in line with long-term rates, which are shaped by factors like inflation expectations and demand for mortgage-backed securities.
• Market Expectations: Mortgage rates are heavily impacted by what investors anticipate for the economy. If the Fed signals a rate cut, mortgage rates might drop, provided investors expect stable inflation and economic growth.
• The Yield Curve: Fed policy changes can reshape the yield curve, impacting longer-term rates like mortgages. But again, it’s mediated by how the market reacts.

Will a Fed Rate Cut Always Lower Mortgage Rates?

Not necessarily. While a Fed rate cut often nudges mortgage rates down, it’s no guarantee. Inflation, global conditions, and investor sentiment all play a part in the outcome.

Volatility on the Horizon

We expect some volatility in the coming months regarding interest rates, and we’re already seeing the shifts play out. In the past six weeks alone, mortgage rates have jumped from around 6.09% to nearly 6.9%. For anyone navigating the market—whether buying, selling, or investing—these changes underscore the importance of staying informed and ready to adapt.

Interest rates have a big influence on real estate, from making or breaking mortgage affordability to shaping demand and investor interest. For buyers, sellers, and investors, understanding how these rates work—and how the Fed plays into it—helps to make savvy, informed decisions. And as always, a knowledgeable real estate professional can help you navigate these waters, whatever the rate environment.

Don’t Wait Until Spring To Sell Your House

As you contemplate the upcoming year, the prospect of moving might be a significant goal on your horizon. However, the question remains: when is the ideal time to make your move? While spring traditionally signals the peak of the homebuying season, waiting until then is not a prerequisite for putting your house on the market. Here’s why.

1. Take Advantage of Lower Mortgage Rates

In October, 30-year fixed mortgage rates reached a peak of 7.79%. By January, they had descended to their lowest point since May, providing a window of opportunity for potential sellers. This decline in rates has made the prospect of moving more economically feasible compared to just a few months ago.

Another compelling reason to consider selling now is the resurgence of buyers in the market. Many had been biding their time, anticipating a decrease in rates, and are now eager to make purchases. According to Sam Khater, Chief Economist at Freddie Mac:

“With the stabilization in rates, potential homebuyers with affordability concerns have jumped off the fence back into the market.”

2. Get Ahead of Your Competition

Currently, there is a higher demand for homes than there are available listings, placing potential sellers in a favorable position. However, it’s important to note that with a recent increase in new listings, more sellers might be entering the market.

Listing your house now allows you to surpass your competition and ensure your property stands out. Working with an agent to set the right price could lead to a swift sale with multiple offers. U.S. News highlights:

“When there is low housing inventory, sellers could get top dollar for their homes.”

3. Make the Most of Rising Home Prices

Experts predict that home prices will continue to rise throughout the year. What does this mean for you? If you’re considering selling your current home and purchasing another, acting now might be wise before prices climb further. This strategy affords you the opportunity to acquire your next home before it becomes more expensive.

4. Leverage Your Equity

Today’s homeowners possess substantial equity. A recent report from CoreLogic indicates that the average homeowner with a mortgage holds over $300,000 in equity.

If concerns about home affordability have held you back from selling, recognizing the value of your equity can be a significant asset for your next move. It may even cover a substantial portion, if not all, of the down payment for your next home.

Bottom Line

If the idea of selling your house and transitioning to a new one is on your mind, let’s connect to initiate the process now. Acting promptly can provide you with a competitive edge and set you on the path to a successful move.

The Surprising Trend in the Number of Homes Coming onto the Market

If you’re thinking about moving, it’s important to know what’s happening in the housing market. Here’s an update on the supply of homes currently for sale. Whether you’re buying or selling, the number of homes in your area is something you should pay attention to.

In the housing market, there are regular patterns that happen every year, called seasonality. Spring is the peak homebuying season and also when the most homes are typically listed for sale (homes coming onto the market are known in the industry as new listings). In the second half of each year, the number of new listings typically decreases as the pace of sales slows down.

The graph below uses data from Realtor.com to provide a visual of this seasonality. It shows how this year (the black line) is breaking from the norm (see graph below):

Looking at this graph, three things become clear:

• 2017-2019 (the blue and gray lines) follow the same general pattern. These years were very typical in the housing market and their lines on the graph show normal, seasonal trends.
• Starting in 2020, the data broke from the normal trend. The big drop down in 2020 (the orange line) signals when the pandemic hit and many sellers paused their plans to move. 2021 (the green line) and 2022 (the red line) follow the normal trend a bit more, but still are abnormal in their own ways.
• This year (the black line) is truly unique. The steep drop off in new listings that usually occurs this time of year hasn’t happened. If 2023 followed the norm, the line representing this year would look more like the dotted black line. Instead, what’s happening is the number of new listings is stabilizing. And, there are even more new listings coming to the market this year compared to the same time last year.

What Does This Mean for You?

• For buyers, new listings stabilizing is a positive sign. It means you have a more steady stream of options coming onto the market and more choices for your next home than you would have at the same time last year. This opens up possibilities and allows you to explore a variety of homes that suit your needs.
• For sellers, while new listings are breaking seasonal norms, inventory is still well below where it was before the pandemic. If you look again at the graph, you’ll see the black line for this year is still lower than normal, meaning inventory isn’t going up dramatically and prices aren’t heading for a crash. And with less competition from other sellers than you’d see in a more typical year, your house has a better chance to be in the spotlight and attract eager buyers.

Bottom Line

Whether you’re on the hunt for your next home or thinking of selling, now might just be the perfect time to make your move. If you have questions or concerns about the availability of homes in our local area, let’s connect.

Don’t Fall for the Next Shocking Headlines About Home Prices

If you’re thinking of buying or selling a home, one of the biggest questions you have right now is probably: what’s happening with home prices? And it’s no surprise you don’t have the clarity you need on that topic. Part of the issue is how headlines are talking about prices.

They’re basing their negative news by comparing current stats to the last few years. But you can’t compare this year to the ‘unicorn’ years (when home prices reached record highs that were unsustainable). And as prices begin to normalize now, they’re talking about it like it’s a bad thing and making people fear what’s next. But the worst home price declines are already behind us. What we’re starting to see now is the return to more normal home price appreciation.

To help make home price trends easier to understand, let’s focus on what’s typical for the market and omit the last few years since they were anomalies. 

Let’s start by talking about seasonality in real estate. In the housing market, there are predictable ebbs and flows that happen each year. Spring is the peak homebuying season when the market is most active. That activity is typically still strong in the summer but begins to wane as the cooler months approach. Home prices follow along with seasonality because prices appreciate most when something is in high demand.

That’s why, before the abnormal years we just experienced, there was a reliable long-term home price trend. The graph below uses data from Case-Shiller to show typical monthly home price movement from 1973 through 2021 (not adjusted, so you can see the seasonality):

As the data from the last 48 years shows, at the beginning of the year, home prices grow, but not as much as they do entering the spring and summer markets. That’s because the market is less active in January and February since fewer people move in the cooler months. As the market transitions into the peak homebuying season in the spring, activity ramps up, and home prices go up a lot more in response. Then, as fall and winter approach, activity eases again. Price growth slows, but still typically appreciates.

Why This Is So Important to Understand

In the coming months, as the housing market moves further into a more predictable seasonal rhythm, you’re going to see even more headlines that either get what’s happening with home prices wrong or, at the very least, are misleading. Those headlines might use a number of price terms, like:

• Appreciation: when prices increase.
• Deceleration of appreciation: when prices continue to appreciate, but at a slower or more moderate pace.
• Depreciation: when prices decrease.

They’re going to mistake the slowing home price growth (deceleration of appreciation) that’s typical of market seasonality in the fall and winter and think prices are falling (depreciation). Don’t let those headlines confuse you or spark fear. Instead, remember it’s normal to see a deceleration of appreciation, slowing home price growth, as the months go by.

Bottom Line

If you have questions about what’s happening with home prices in our local area, let’s connect.