Understanding How Interest Rates Affect the Price of Your Home

Understanding How Interest Rates Affect the Price of Your Home

  • Stanton Hoch Team
  • 04/5/22

The past two years have been a bit unpredictable — and not just in the real estate market, either. Everyone is waiting to see where home values and interest rates will land at the end of the year.

The assumption is often that rising interest rates will dampen demand for Upper West Side real estate and thereby reduce home values. This isn’t always the case. In fact, it often isn’t the case because there are many other factors influencing home values.

The effect of interest rates on your home’s value

How interest rates are determined

A few factors affect mortgage rates. One of the factors is based on how well mortgage-backed securities, which are bundles of mortgages packaged together, sell on the market. How they sell on the market varies by current events and economic conditions.

The Federal Reserve Bank sets the base, or the floor, for interest rates. In an attempt to stimulate the economy and sedate inflation, they raise rates to slow consumer demand and lower rates to raise consumer demand.

Access to available capital also affects interest rates. When lenders have easy access to funds, they are more likely to offer better terms. If there is a tight supply of funds and available capital, they will raise interest rates and/or fees. The interest rate you pay for your Upper East Side townhouse is fluid until you lock it in with your loan.

How interest rates affect demand

When interest rates for mortgages are low, it stimulates demand. People who have been wanting to buy but for whatever reason haven’t yet will decide to move forward, and a surge of homebuyers will enter the market.

Low interest rates also create a surge in refinancing. Current homeowners will refinance their homes to take advantage of the lower rate and reduce their monthly mortgage payments. Some will leverage their equity and take a cash-out option. It won’t reduce their monthly payments as much, but they can use the cash to invest in more real estate or to make improvements on their current property. When interest rates are rising, people tend to be more cautious about taking out a loan.

How interest rates affect supply and demand

When a surge of homebuyers enters the market, the demand for homes goes up, and available inventory shrinks. Whether this affects home values depends on how long the surge lasts and whether there is available inventory to meet the new demand. Nationwide, buyers are experiencing a shortage of inventory. The biggest deficit is in quality homes for first-time homebuyers.

The current inventory shortage will have a continued effect on the value of an Upper East Side townhouse, regardless of where interest rates land. Interest rates also affect the availability of capital. If you want to borrow money from the bank, they need to have access to funds so they can lend it to you.

How interest rates affect value

High interest could, theoretically, curb the demand for Upper West Side real estate. If the demand for homes abates, home values might taper off. This could happen, but it is not the rule. It is just as likely that home values will continue to rise as interest rates rise.
The key here is that interest rates are not the sole factor determining home values. If a growing family needs a new home, interest rates are not going to change that need. If they can’t find a home to buy, though, they have limited options. Supply and demand have a bigger impact on home values.

How inflation affects value

Home values tend to rise with inflation. The value of anything is determined by what people are willing to pay. If we are in a strong economy and people have money to spend, they will be willing to pay more for the goods and services they want. If we are in a tight economy and people are hesitant to spend money, they are more likely to see some goods and services as too expensive.

Thus, as inflation occurs, home values rise. This, in turn, gives homeowners more equity. They can leverage their new equity to purchase more real estate or to make improvements on their current property, which in turn creates more demand and limits supply, thereby increasing home values again. 

How interest rates affect you

The key to making smart decisions is to understand your options and know what the numbers are. You are not limited by the current interest rate for 30-year mortgages. There are other mortgage options available. You can even buy points to reduce your interest rate. This, of course, depends on your goals. If you are making a long-term investment, you are more likely to save money in the long run by buying interest points. If you are looking to flip a property or another short-term investment, you will likely pay more to buy down points without receiving any benefit from it because you didn’t hold the property long enough. Talk with your lender about the different lending options available to you.

How working with an agent affects your investment

Whether you are buying or selling real estate, working with experienced agents makes a difference. They are also skilled negotiators who can help you save money if you are buying and gain money if you are selling. They understand the current market and know how to price your property to attract qualified buyers. Working with a good real estate agent gives you an edge in your buying or selling strategy.

Looking for Upper West Side real estate?

Over the last 50 years, higher inflation led to higher home appreciation. Watch our video and contact us to see what your home will be worth in 2022!

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