How Do Rising Interest Rates Affect the Housing Market?


The current economic environment that we live in is all over the place. From high inflation to record gas prices, there are a lot of things going on in the economy that affect how much money Americans have left in their pockets at the end of the day. The stock market is fluctuating more than normal, grocery prices are skyrocketing, and life just seems like it costs more these days.


Alas, life must go on! The Federal Reserve is trying to do whatever they can to reign in the inflation and the rising prices. One of the best tools at their disposal is to change the interest rate. Interest rates affect all sorts of borrowing, both between businesses and individuals. One part of the economy that will always exist is the housing market. After all, people will always need a place to live! The housing market is one of the most important sectors of the economy, as it directly affects everyone. This post is going to dive into how the changing interest rates affect the housing market, both for sellers and for buyers, and what you can do to make the most of the situation in either case.


brown and white concrete house under blue sky during daytime


How Do Interest Rates Affect Home Buyers?


·      You Qualify for a Lower Maximum Principal Amount


One of the biggest impacts that rising interest rates have on home buyers is that the maximum principal amount of their mortgage decreases. This is because banks use formulas to calculate how much money they will loan buyers based off of the buyer’s income and the resulting monthly payments. Lenders will only allow a buyer’s monthly payment to be a certain percentage of their monthly income, so as interest rates rise, payments need to stay relatively the same. This means that the principal amount must decrease in order for the math to check out.


How does this look in action? Here is a simplified view. We will pretend that amortization does not exist and principal and interest remain flat throughout the life of the mortgage. With an interest rate of 5% and a monthly payment of $2,000, you would be paying $1,900 of principal and $100 of interest. If the interest rate rises to 10%, but your income remains the same, your payment would need to stay $2,000, but you would be paying $1,800 of principal and $200 of interest. This would mean that over the course of a 30-year mortgage, you would now only be paying $648,000 instead of $684,000, lowering the maximum principal the bank would loan you by almost $40,000.


·      You May not Find Homes that You Can Afford


This point is a direct result of the first one. As banks will loan buyers less money when the interest rates are higher, buyers will likely have a harder time finding homes that they can afford. If your maximum spending limit decreases, you are naturally priced out of a portion of the market. While the effects are usually not as drastic as the example above, they do exist and can make a difference for any buyer in the home buying market. There are other factors in play that could eventually bring the market into equilibrium and lower prices, but in the short-term many buyers likely remain priced out of what would have been the higher end of their budgets.


·      Rent Might Increase Faster than Mortgage Payments


When buyers realize that interest rates are suddenly very high, many decide to just rent for the time being until the interest rates drop back down to a more reasonable level. After all, interest rates tend to fluctuate quite a bit, and banking on the rates to fall at some point in the relatively near future is usually a safe bet. While this strategy has some merit, buyers should double check that rent is not rising faster than the cost to borrow a mortgage. If rents are increasing 15-20% year over year, you would actually save money to take out a mortgage at a high interest rate now rather than paying higher rent and waiting for a lower interest rate. If rent remains somewhat stagnant in the area where a buyer is looking to buy a home, then renting may be a preferable option.


How Do Interest Rates Affect Home Sellers


·      There Might Be Fewer Interested Buyers


Stemming off of the point above, many buyers may simply choose to hold out until interest rates drop again. Some buyers are not in much control over their situation, as they need to buy a home in the near future regardless of market dynamics. If your family is set to expand soon or you are being forced to relocate because of a job, you may not have much wiggle room. However, as borrowing at an unfavorable rate is not preferable in most situations, buyers that are in no hurry to purchase a home will simply sit back and wait for the situation to change. Interest rates tend to fluctuate quite a bit, and these buyers are often more than happy to wait for a better environment to buy a house in. This can decrease the demand for houses strongly.


·      You May Have to Lower the Price of Your Home


This point is a direct result of the first point. If demand falls, sellers usually have two options: reduce their asking price or wait it out. It is likely that buyers will have reduced desire or capacity to buy a home while interest rates are high, so sellers may need to either wait for demand to increase or agree on a lower price with an interested buyer who currently has a reduced capacity to pay. Neither of these are preferable, but sellers who are in a hurry to close a sale on their home might be left with no other choice than to accept less than they desire. While some sellers may opt to hold onto their house until interest rates fall and home prices rebound, this could take years and is not a safe outcome to base your decisions on. If anything, it is more of a gamble.


·      You May Struggle Finding a Home to Buy


Just as other homebuyers may experience decreased capacity to pay, sellers may feel a similar squeeze. If a seller is forced to accept less for their house than they desired, they may then also be forced to purchase a home that is cheaper than they would have initially desired. While price is not always an indicator of quality, this usually means a house that is either smaller, older, or located in a less convenient place than the alternative would have been if their budget had remained the same. The squeeze affects all sides of the market until equilibrium is reached, and this equilibrium is unlikely to occur in the short-term.


brown and white concrete house near green trees under blue sky during daytime

What Can Home Buyers Do to Capitalize on High Interest Rates?


·      Find a Good Realtor


First and foremost, the best thing that a home buyer can do in any market environment is find a high-quality realtor to help them through the process. Buying a house is not like changing a tire. There is more than one way to go about it, and you will always strike a better deal if you have a professional advocating for you through the process. Local realtors know the specific market dynamics of the area where you hope to buy a home, and their expertise can prove to be invaluable. From helping you to select the right house to helping you determine a fair value to pay, realtors usually help you to both select the right house and not overpay for it.


We at the Boyd Team operate in the Grand Strand area of South Carolina, and we can’t even begin to tell you how grateful our clients are that they decided to work with us. From knowledge about seasonal weather patterns, to expectations about insurance, to the inside scoop on neighborhoods, builders, schools, and more, our expertise has been invaluable to our clients. Regardless of where you are moving, getting in touch with a top-tier realtor in the area is one of the best decisions that you can make.


·      Strengthen Your Financial Background to Have an Advantage over Other Buyers


We mentioned earlier that a common strategy is to wait it out until interest rates decrease. If you decide to do this (or even if you decide to still purchase in the short-term), one of the best things that you can do before buying a home is get your finances in order. From paying down pre-existing debts to saving up extra money for a down payment, strengthening your current financial position is one of the best things that you can do before you buy a home. Making a higher down payment reduces the total amount of interest you will pay throughout the life of the loan, and paying down other debts can help your credit score to rise, which could lower the interest rate that the mortgage lender offers you.


·      Get Pre-approved for a Mortgage from a Mortgage Lender


At a more transactional level, one of the best things that you can do before buying a home – especially when interest rates are on the rise – is get pre-approved for a mortgage. This pre-approval both helps you to understand how much you can spend on a house and shows to sellers that you can get the funding necessary to purchase a their house. Getting pre-approved for a mortgage is a great idea in any scenario, as it helps the process to flow more easily. If you are not pre-approved, you can lose out to another buyer who is. On top of that, you never want to waste time looking at houses that you can’t actually afford. Getting pre-approved can help you better calibrate your home search before you start attending tours and open houses.


What Can Home Sellers Do to Capitalize on High Interest Rates?


·      Look to Sell Now while Values and Demand are High


While everyone’s situation is different and there are certainly people who should not look to do this, one of the best things that home sellers can do to capitalize on the current market dynamic is to act quickly. Normally when interest rates rise, home prices fall. This is because the demand is restricted by the higher interest rates, and prices will fall accordingly until demand picks back up.


The current market environment is a bit different, though, as the pandemic created an above average surge in demand. Even though home prices have fallen from their peaks and interest rates have risen, there is still a good degree of pent-up demand. In addition, homebuilders are still having a tough time with supply chain squeezes, which is decreasing the overall supply of new homes. As new home supply stays limited, demand for pre-owned homes will remain elevated. Selling quickly while the demand remains elevated could help you to get the most for your home before the prices fall.


·      Be Ready to Accept Less if You Can’t Sell Immediately


We mentioned this in the section above, but it needs to be reiterated here. What happens in the housing market is entirely out of your control, and there is very little you can do to evade it. If housing prices are going to fall, they are going to fall. Houses are investments, after all, and the value of any investment can rise or fall. While the strategy of just holding onto the home until prices rise again is great in theory, not everyone is able or willing to stay put in their home for five more years with their fingers crossed in hopes of the market rebounding. After all, that is a long time to wait to gamble on the value of your home. If you aren’t able to offload your house immediately, you should mentally prepare that you might get less that you desire when finally finding a buyer and agreeing to terms on the sale.


·      Consider Renting between Selling and Buying


If the only reason that you are unable to sell in the short-term is because you are unable to move into a new home in the short-term (i.e. you are having one built or are waiting for another home to be vacated), you may consider selling your home now, moving into a rental home in the interim, and then moving into your next home when it is ready or the time is right. This could help you to get the highest selling price for your current house without needing to compromise on the house that you subsequently purchase.


If you consider this route, it is definitely best to consult with either a realtor or a financial advisor, as this strategy is only advantageous in a select few circumstances. For example, if you are having a new house built and it won’t be ready for a full year, you might consider selling now and moving into a rental home for the next year. However, if your new home is going to be ready in just three or four months, this strategy may be more hassle and strain than it is worth. Additionally, it might not even save you that much money, if any at all, if your plans are all in the relatively short-term or the distant long-term.


white and red house


That is all we have for you about how rising interest rates affect the housing market! Understanding the economic factors driving housing prices can be difficult, and we hope that this post provided you with some clarity about what is happening and what you can do about it. While you will never be able to control the economy, you can certainly take steps to reap the benefits or avoid the potential disasters that exist in the current economic ecosystem. As always, contacting a good realtor should be the first step in any home buying considerations, as nobody will understand the current dynamics of the market as well as them.

If you decide to visit Myrtle Beach or any other place in South Carolina and fall in love, reach out to us for help. We at The Boyd Team are always here to help you figure out whether Myrtle Beach is your next home or not, and we are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.  

No One Knows The Grand Strand Better! Trust, Knowledge, Experience, Professionalism, You Can Count On!