If you read or watched any financial news in the past few months you have probably heard that interest rates are rising. So what does this mean for you if you are looking to buy a house, apartment building, farm, or any other type of real estate? Let's work through the numbers to find out.
I think a good example to analyze is someone looking to purchase a home since this applies to the most people. Most home buyers don’t have the cash to buy a home without financing and even if a buyer has the cash most often prefer to get a loan to purchase a home. One of the more popular loans for doing this is a 30 year fixed rate loan.
Here is a chart showing the 30 year fixed rate mortgage interest rates from around the first of January 2021 through the first of May 2022.
As you can see from the chart above there has been a continual rise in rates for the 30 year fixed rate mortgage. With a more pronounced rise in rates since the beginning of the year.
Zooming in on the rates from the beginning of the year we get this chart.
This chart shows us that the rate around the first of January 2022 was approximately 3.11% and has risen to around 5.27% at the time of this writing in May 2022. That’s an increase of roughly 2.16% in only five months.
So what does this do to your payment?
Well, if you were to borrow $500,000 at 3.11% your total payment (principle and interest) would be $2,138 per month. That same amount borrowed at 5.27% would make your payment is 2,767 per month. That is a $629 per month more than you would have paid five months earlier. To top it off, a 30 year fixed rate mortgage at 5.27% costs you $226,590 more in interest than it would have in the beginning of the year. That is a big increase in a short period of time!
So has this made the home price decline? Well, it's hard to say because we don't have the data for this yet, but we do have the data from 2021 through April of 2022 and the average home value continued to push higher. Below is the chart.
From the first quarter of 2021 through April 2022 the average home price increased approximately $58,900 or 15.93% in that time frame.
Will this trend continue?
Like I said above most people get a loan to purchase a home and the cost of borrowing has risen dramatically. In addition, the average home price continues to rise. This is making that home at the beginning of the year look a lot less affordable now. With that said though inventory is still relatively low and even with rates high there is still demand for housing. Simple supply and demand tells us until the supply equals the demand, the prices of homes will continue to rise. In my opinion, I do think demand for housing will eventually soften as the year progresses. Especially if mortgage rates continue to rise as quickly as they have over the last five months.
It will be interesting to watch.