As stocks take a tumble, largely due to rising interest rates, it’s got folks wondering what this means for the real estate market. You might think that higher mortgage rates are a bad thing, but there’s another side to the story.
One reason I’m a fan of real estate investing is because property values tend to stay steady. They’re kind of like the tortoise in the classic "tortoise versus the hare" tale – not too fast, not too slow, just steadily moving along. This is why, even when stocks dipped in January 2022, the national median home price probably remained stable, or even increased a bit.
Now, I did predict that the rate of appreciation for housing prices would slow in 2022, from around 16%-19% the previous year to around 8%. This was partly due to the expected rise in mortgage rates. But even an 8% appreciation rate is pretty good, especially if other investments don’t do as well.
Fast forward to 2023, and housing market predictions are all over the place. But I’m fairly confident (about 75% sure, to be precise) that the median housing price will drop by 8% to $419,000.
Now, let’s not forget that higher mortgage rates could actually be a good thing for the housing market. Here’s why:
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It weeds out the less serious buyers, which helps ensure the market stays healthy. Remember the financial crisis in 2008-2009? That was partly because people were overextending themselves to buy homes they couldn’t afford. Higher mortgage rates could prevent this kind of thing from happening again.
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It gives buyers with more cash a better chance to compete. In a hot market, you might have to outbid several other buyers to secure a property. If mortgage rates rise, there might be fewer buyers to compete with, and you might not have to offer as much money.
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It’s less stress for sellers. Selling a house is stressful, especially if a deal falls through and you have to start over. But with higher mortgage rates, there might be fewer offers to consider, and those offers might be more serious.
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It might actually boost prices in the short term. Buyers might rush to secure a property before rates go up even more, which could drive prices up. But don’t let fear of missing out push you into making a hasty decision. You can’t change how much you paid for a property, but you can often refinance to get a better mortgage rate.
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It’s a sign of a strong economy. Interest rates usually go up when the economy is doing well. This can lead to higher inflation, which can then push interest rates even higher. It’s a cycle that repeats again and again.
Below, you’ll see a chart from the Federal Reserve showing how housing prices have behaved after mortgage rates started rising. In each case, prices went up, which suggests that a strong economy can outweigh the effects of higher mortgage rates.
In the end, a more normal housing market is a healthy housing market. As a real estate investor, you don’t want to see a repeat of the chaos of 2007-2010. You’re looking for steady returns. And in the long run, higher mortgage rates might actually be good for the health of the housing market.
If you’re thinking about investing in real estate, check out Fundrise. They specialize in single-family rental properties in high-growth, low-valuation areas of the country. And if you need a new mortgage or want to refinance your current one, check online for the best rates.
So what do you think? Do higher mortgage rates make you more or less likely to invest in real estate? What are some other pros and cons you can think of? And given the current state of the stock market and the stability of the real estate market, are you leaning more towards buying stocks or real estate? I’d love to hear your thoughts.
