How Have Higher Interest Rates Impacted the Real Estate Market?

The real estate market has changed a lot in less than a year, mainly due to higher interest rates. To help make sense of it, we’re breaking down what this means for buyers and sellers, how we got here, and where the market is going.

Multiple rate increases by the Federal Reserve have drastically increased what were record-low mortgage interest rates. The average mortgage rate at the beginning of 2022 was 3.22% and was 6.70% by the end of September. For a $500,000 home with 5% down, the difference in monthly payment is over $1,000 per month! To put it a different way, you would need that $500,000 home to drop down to just under $336,000 in order to have the same monthly payment at the new rate.

Does this mean that home prices are going to drop by 32%? No, and even with the amount that they’ve come down so far, buyers’ monthly payments are still far exceeding what they would have been earlier this year. This underscores just how much of an impact the rates have had on monthly payments. Let’s say our hypothetical home which was worth $500,000 in early 2022 now sells for $470,000. The house’s value has now gone down $30,000 but the buyer’s monthly mortgage payment will still have increased by $820+. This means that not only are prices coming down, but homes are sitting on the market longer as there are fewer buyers willing/able to lock in at a significantly higher monthly payment. For home sellers, that’s two pieces of bad news, which is difficult to accept after two years of seeing your neighbors sell for record-setting prices.

For homebuyers, the shift is bittersweet. Gone are the days of losing out on home after competitive home, waiving every contingency, and checking online every waking hour so you don’t miss a new listing and a too-short offer deadline. There are, at long last, homes that are available long enough for you to actually see them in person. You can submit an offer and actually perform a home inspection. But everything is, somehow, even less affordable than it was six months ago. Interest rates have put many homebuyer searches on hold.

To illustrate how values have changed, let’s look at my home neighborhood of Fairlington. We sell homes all over the DMV area, but Fairlington is one of the best locations for pulling meaningful real estate data that I’ve found. Because of its size, relative annual turnover, and uniform home models, Fairlington is one of the best neighborhoods for apple-to-apples real estate market data. Let’s specifically look at the Clarendon I model townhome, which has two bedrooms, two bathrooms, and 1,500 finished square feet. It’s the most commonly sold model in Fairlington with about 50-70 sold every year. At any given time, you can get a good temperature on the real estate market by looking at active and recently sold Clarendon I listings.

In this case, prices are down about 5% from their absolute fever pitch in the first half of 2022. What’s important to remember is that the Q1/Q2 market was an absolute anomaly brought about by historically low interest rates. We are still seeing prices comparable to 2020 values, when the average rate was still 3.11%.

Ok, so that’s a lot of data. But what does it mean? Here are our key takeaways for buyers and sellers as we move into Q4 2022 and beyond:

Key takeaways for sellers

  • Is now a good or bad time to sell? As usual, that largely depends on your life circumstances. You won’t be getting the record-setting price you would have gotten six months ago but sellers are still seeing healthy returns. If you are eyeing a bigger space, a new job, or a change of location, that goal can still be realized.
  • If you want to hold out for early 2022 prices, it could be a while. How long? Nobody knows for sure. Even multi-billion dollar tech companies have found that real estate speculation is very, very difficult.
  • Throw the comps from six, three, or even two months ago out the window. The rate hikes mean that now, more than ever, the best comps to use are those sold within the past 30 days.
  • Homes are taking longer to sell. For the past few years, getting multiple offers after your first open house seemed to be the norm. Now homes are routinely taking 3-4 weeks (or more) to get their first offer. This means more showings, more open houses, and more time spent keeping your home looking its best for buyers. If you have the ability to make your move before listing, you could save yourself a lot of stress (and don’t worry about how it looks without your furniture because we will stage it absolutely free).
  • Earlier this year, buyers were competing for homes. Now, sellers are competing for buyers. This means that preparation is key. 90%+ of marketing a home takes place before ever going on the market by getting it ready. This means making repairs and minor improvements that will help you sell faster and for more money. Don’t have the time for that? We have a book of contractors and will oversee the entire process from start to finish. Are your resources tied up in the home? We have a solution for that too.
  • If you want to hold off on selling to see how the market plays out, renting out your home is an option. However, it’s important to understand that being a landlord is a job in itself with its own costs and duties. Our rental division can talk you through what this means and help you find a great tenant.
  • Contract contingencies, usually waived in the hot market earlier this year, are back. This means that your buyer will likely have a financing, appraisal, and home inspection contingency.

Key takeaways for buyers

  • A lot of buyers have put their searches on hold because the numbers just don’t work with the new interest rates, and that’s completely understandable. That being said, we don’t suggest sitting on the sidelines because you’re waiting for a market “crash”. Again, getting rich quickly through real estate speculation is famously difficult. There’s no indication that we’re going to see the kind of drops that we saw in 2007-2008. If you have the means, the better bet is to find a home that you love that is going to be a good long-term investment.
  • Your selection of homes will be completely different now than it was earlier this year. Gone are the days of making five, six, or seven offers (or more!) before finding a home. You can get into a home that you really love and actually do a home inspection, not shell out a massive earnest money deposit, etc.
  • Play the long game. If you can get a home for $50,000 less than it was earlier this year and the payment is $700/month more than you were expecting, you come out ahead if you can get the payment down via refinance within 71 months. Low rates were great for your monthly payment. Higher rates have lowered prices and are better for real estate as a long-term investment.
  • We did some math earlier in this post comparing rates in the 3s to rates in the 6s and 7s. This underscored how difficult the shift has been. However, that doesn’t mean that 3% mortgages are the benchmark around which you should plan your future. We have no idea when rates could get that low again. Also, remember that at least some of the cost of higher rates has already been offset by lower prices.
  • Trying to time your purchase so that you get the lowest home price AND the lowest interest rate is an almost impossible needle to thread.
  • Learn about buying down interest rates. Ask your lender. There are ways to get your monthly payment down now (and in this market, you may be able to get help from the seller to pay for it).
  • It never hurts to talk to a lender. The good ones will not mind running numbers for you. At worst, you find out this isn’t the right time. At best, they can find you a loan product that can get you a lower rate than you expected. This month, we’ve already put buyers in touch with lenders that can skirt the pesky .25% rate increase on condos AND helped buyers get a better rate through buydown credits. Need a recommendation to a great lender? Let’s chat.