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Higher Interest Rates Could Actually Reduce Housing Supply Further. Here’s Why.

By Thomas Carroll, REALTOR®

Many experts say the housing market is at an inflection point. The home financing landscape is changing rapidly and the effects of that will make their way through the system. Mortgage rates have almost doubled since December of 2020 and are up 40% in the past four months alone. The common narrative is that this will reduce housing prices. However, that is not necessarily true. There are some competing incentives at play here. On the demand side, higher mortgage rates very well could reduce demand. But higher rates could also reduce supply.

Home builders may become less likely to build as they struggle to maintain their profit margins with materials, labor and now financing costs having increased significantly over the past two years. When it comes to individual homeowners, there is very little economic incentive for them to move now.  Over 90% of homeowners have a mortgage rate below 5% and 70% of homeowners have a rate below 4%. As a result, when existing homeowners decide to move today, they are entering a market where the cost of both the home and the new mortgage are significantly higher than they were just a year or two ago.  So sure, demand will likely go down but supply might constrain in kind, with builders building less and homeowners staying put.

I’m not claiming to know what home prices will do in the coming months or years. This is just some food for thought because it’s not as simple as interest rates are up so prices will go down. This could go either way. So, how do you navigate this uncertain housing market? Everyone’s situation is different but, in my opinion the guiding principles should be as follows:

  1. Focus on buying or selling when the time is right for you and your family, not on timing the market.
  2. Control what you can control by leveraging every tool and advantage at your disposal.
  3. Take a long-term view.

If you believe the time is right for you to buy and sell, I would love to learn about your personal situation and be the agent to help you achiever your goals in this dynamic housing market. Please feel free to reach out to me and we can get started!

This entry was posted on Monday, May 16th, 2022 at 4:34 pm. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.