Why Home Prices Go Up When Interest Rates Are Low
While low interest rates are known for attracting new homebuyers and driving up mortgage applications, they can also affect the housing market. Much like other aspects of the economy, an increase in demand can lead to a rise in prices.
Fortunately, it’s not all bad news for buyers who are still planning to take advantage of historically low interest rates. Understanding why home prices may be increasing in your market and what adjustments to your home search you should consider can give you the confidence to make the right home-buying decisions.
Lower Inventory, Higher Prices
Even before interest rates fell to historic lows, a lack of inventory has been challenging homebuyers throughout the country. Older homeowners, including the enormous baby boomer generation, are remaining in their homes, limiting the options for the even bigger millennial generation who are beginning to enter the market.
As new construction projects struggle to keep up with the increased demand, prices have been steadily rising. Substantial interest in homes for sale can lead to multiple offers, raising the price of that property and increasing the appraisal values of surrounding homes.
Lower Rates, Bigger Loan
The upward pressure on prices may seem like a difficult hurdle to overcome, but the good news is that lower rates also have an offsetting benefit for buyers. As interest rates fall, the borrowing power of shoppers grows. In addition to lowering payments, the drop in rates can lead to more generous loan programs from lenders wanting to maximize their profits.
Of course, your budget considerations should include other factors besides the amount you are approved to borrow. Be sure to consider all of your expenses carefully, current and future, to avoid taking on a mortgage that you can’t afford.
Lower Demand, Better Deal
Since higher prices are driven primarily by the higher demand, patient homebuyers may be able to find a deal worth waiting for. The fall and winter buying seasons are typically slower than spring and summer. While interest rates are not expected to rise dramatically, making buying now an attractive move, the number of home shoppers could decrease through the end of the year in certain markets.
Buyers who can accelerate their search during these off-peak months may find that sellers are more willing to negotiate. Similarly, a home that went unsold during the spring and summer may have motivated owners as the year comes to a close, making a lower-than-expected price possible for a shrewd buyer.
Start the journey to your next home sooner rather than later with the resources and expertise available on our website. Our experienced originators are ready to guide you through the application process and help you find the right path to your next home.