By now, you’ve almost certainly heard about the Federal Reserve increasing interest rates. If you’re in the process of relocating, you’re likely wondering, “How will rising interest rates affect home prices?” Whether you’re buying or selling a home, higher interest rates will impact you, making it important to understand exactly why that is and what your options are.

First, let’s define what we’re referring to by interest rate in this context. The Federal Reserve sets the federal funds rate, which is the interest rate at which banks can lend money to one another overnight. Because these same banks are often issuing home loans, the federal funds rate impacts mortgage interest rates.

Typically, when the federal funds rate increases, mortgage rates increase as well. The inverse is also true, lower federal funds rates typically result in lower mortgage rates. Even a fraction of a percentage point can have significant impacts on this relationship.

Why Has the Federal Reserve Increased Interest Rates?

Higher interest rates don’t seem like a great thing for the housing market, so you might wonder why the Federal Reserve is continuing to increase them. The answer is related to inflation.

There are a few things to keep in mind about this situation. One is that average housing prices are currently at record highs. Another is that mortgage rates have been at historic lows for the last several years.

Aside from keeping long-term interest rates under control, the Federal Reserve is also tasked with maintaining stable prices for products and services. The Covid-19 pandemic put unprecedented strain on the American economy. Through a combination of many factors, including lockdowns, supply-chain disruptions, and stimulus injections, inflation has gone up at an alarming rate.

The Federal Reserve has increased the federal funds rate multiple times in an effort to combat rapidly rising prices. The Federal Reserve’s hope is that if money becomes more expensive to borrow, people will be inclined to spend less of it, bringing the rate of inflation down.

How Do Rising Interest Rates Affect Home Buyers?

As we pointed out earlier, a higher federal funds rate often results in higher interest rates across the board. Rising mortgage rates are directly tied to the actions taken by the Federal Reserve.

But as a home buyer, what does this mean for you?

Your monthly mortgage payment may increase or be larger than it would have been in previous real estate markets. Because rates have gone up, you will likely owe more per payment, depending on the specific terms of your loan. This means that you might need to make adjustments to how you manage your personal finances, as your mortgage will now be a larger percentage of your income.

Related to this fact, a higher debt-to-income ratio could mean that you qualify for a smaller loan amount. Regardless of your credit score, higher interest rates make larger loans harder to obtain. This is especially significant for first-time home buyers who might not be able to afford a large down payment.

Furthermore, you might have more difficulty finding what you want in a price range that you can afford. Because a larger loan will be more difficult to get, you might need to compromise on things such as size, location, or amenities when shopping for a new home.

How Do Rising Interest Rates Affect Selling a Home?

Sellers are also not immune to some of the difficulties of higher interest rates. Despite the fact that the average home price has increased significantly over the last couple of years, there are some important factors to consider before listing your home.

One thing to keep in mind is that unless you are planning to make a significant lifestyle change, you will also need to be shopping for a new home while your current one is on the market. This means that all of the challenges listed above will likely apply to you.

You also might not have as many interested buyers. The frenzy of home-buying over the last year or so has begun to cool down. Higher interest rates have made some people less eager to buy a new home. This means there are fewer people in the market, and you might have to come to the table ready to negotiate.

Because of the difficulties that buyers now face, you also might not get as much for your home as your previously expected. The housing supply is still relatively limited, meaning there’s hope for a good price. But as things cool down and the supply increases, you might experience a reduction in home prices in your area.

What Should I Do About Higher Interest Rates?

Although nobody likes to see higher rates, there’s no reason to despair! Inflation rates have slowed down for the last four months in a row, meaning the Federal Reserve might not need to make any more drastic increases to the federal funds rate. Also, with fewer people to compete with, you might have a better chance at snagging that perfect home!

An important first move is to get pre-qualified for a home loan. Our lenders would be happy to help you with this important step. Simply fill out our form here and we will get in touch with you as soon as possible.

You’ll also find more success in this tricky market with a trusted real estate agent by your side! Our team is dedicated to helping you through the process of buying a home. We also have years of expertise specifically working with military families relocating to the Phoenix and Tucson areas. We understand our market, and can help you make a decision that works best for you.

Contact Desert Heroes Today to Begin Your Journey

Despite higher interest rates, our team has continued to find military families the housing that they need at a price that suits their budget. As members of military families ourselves, we understand the challenges you might be facing. Our mission is to help you overcome those challenges with unparalleled service, understanding, and integrity.

If you are relocating to Luke AFB or Davis Monthan AFB and beginning your buying or selling journey, we would love to get in touch with you today!