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The short version

  • Rising interest rates affect home affordability for buyers by increasing the monthly mortgage payment.
  • Despite how it seems, there are benefits to buying when interest rates rise.
  • Less buyer competition forces home sales prices down, opens up more choices for buyers and can reduce buyer risk.

Benefit #1: Lower housing prices

During the low interest rate environment over the past two years, there were too many buyers competing for a historically low inventory of homes for sale. You’ve probably heard about multiple offers over asking price being the norm. Supply and demand were out of control in this crazy market.

But rising interest rates are helping to rectify that issue. Higher interest rates reduce the number of buyers who qualify for a mortgage loan, thereby reducing the competition for homes.

Higher interest rates have two effects on the housing market that can help drive down prices:

  1. They price some buyers out of the market which is good for the buyers who remain; and
  2. They typically have the effect of putting downward pressure on housing prices which is good for buyers.

Benefit #2: More home choices available

While rising interest rates continue to take out buyers who can no longer afford the higher monthly payments, something else is happening. More inventory is coming on the market. In June 2022, inventory was up 19% over the year prior.

These two trends – rising interest rates and more inventory of homes available – mean there are more choices available for qualified homebuyers.

While homes are still selling relatively quickly compared to before the pandemic, the housing market is seeing homes stay on the market longer. With additional listings coming on market and longer “days on market” for current listings, inventory is increasing. And that’s a good thing for buyers.

More: How to buy your first home

Benefit #3: Less buyer risk

Over the past two years of buyer competition chasing limited supply of homes, a lot of buyers were waiving offer contingencies. Why? Because offers with fewer contingencies present a better chance of being chosen by the seller.

However, among the contingencies that were being waived included two important ones: The inspection and the appraisal. With the market evening out, inspection and appraisal contingencies are re-emerging. Here's why that's a good thing for buyers.

The inspection

Purchasing a home involves a lot of unknowns which carry risks. You’re buying a tangible asset that’s subject to wear and tear. Murphy’s law would have it that as soon as you move in, a major (and expensive) system like the HVAC will fail.

In a normal market, the buyer requires an opportunity to inspect the home. If they don’t like what the home inspection shows, they can back out of the contract.

This is an important step to understanding what you’re buying. A licensed inspector will provide details on the age and condition of important structural and mechanical things that a homebuyer needs to know. How many years of life is left on the roof? Is the HVAC system functioning properly? Does the foundation have a crack that threatens the home’s stability?

Consumers and agents are not expected to know or trained to see these things, but an inspector is. While the results of an inspection is not normally an opportunity for renegotiation of offer price, it can serve that purpose if conditions that would require substantial investment are found.

The appraisal

The market over the past two years favored cash buyers and buyers with a substantial down payment saved. That’s because bidding wars were pushing prices over the seller asking price. This often meant the home would not be appraised for the offer price.

For borrowers, that’s a problem. When securing a mortgage, the lender often requires a well-researched value assessment by an independent licensed appraiser. After all, they want to ensure the home is worth the amount of money they agree to finance.

As a result, only buyers with additional cash to pay the difference between offer price and appraised price were able to compete, as sellers would only accept an over-listing price offer if the buyer could sign an appraisal gap addendum.

Should you buy a home now?

While there are sensationalized headlines about a housing market crash circulating on the internet, agents who have their boots on the ground are not seeing an imminent crash, but rather a much needed market correction.

In fact, in a HomeLight survey of 1,000 agents about the current housing conditions, the consensus was generally optimistic. There are fewer bidding wars, fewer offers and more price reductions. These are signs of merely a shift, not a housing market crash.

As a licensed agent in Maryland, I concur. The housing market has been moving at a crazy pace and was in dire need of a dose of sanity. Highly-desirable homes were selling the first day they hit the market with multiple offers pushing prices well over listing price.

The market was in need of a correction to quell the buying frenzy. Thankfully, with rising interest rates and increasing inventory, the housing market is returning to normal. There’s a healthier balance between buyers (demand) and sellers (supply). And higher interest rates are even pushing home sales prices down, as buyers can afford less.

The Fed had been hinting about higher interest rates for the past 18 months. But it just recently began to kick rate hikes into high gear. And there are continuing discussions about additional upward pressure on interest rates.

With that in mind, if you're looking to buy a home within the next 12 months, it may be wise to buy now and lock in today’s interest rate. This could be particularly true if you have to sell a home at the same time you're buying, as potential buyers of your current home might be looking to lock in today’s rate as well.

However, if you can wait at least 12 to 24 months to purchase your home that might not be a bad decision. If inflation has subsided by then, the Fed is likely to begin to reducing interest rates again. So at that point, home prices may be slightly lower than they are today while interest rates may be very similar.

More: The best (and worst) times to buy a house

Buying a home while interest rates are high

It’s natural to think of rising interest rates as all bad news for homebuyers. After all, higher rates means higher monthly payments when taking on the same amount of mortgage debt.

But that doesn’t mean there’s no silver lining to buying when rates are high. There’s likely to be less buyer competition for the home you want, plus there's the potential that the higher rates will provide downward pressure on sales prices.

And, remember, you can always refinance when rates come down again provided that your income and credit score remain strong. Or you may even want to consider taking out a variable-rate loan to start with so that you can potentially lower your rate over time without having to take out a new loan and paying closing costs.

The bottom line? If it’s time to move, don’t let higher interest rates put your home buying plans on hold.

Thinking about getting into the market? Read our guides below:

About the Author

Ruth Lyons

Ruth Lyons

Freelance Contributor

Ruth Lyon is a freelance contributor for Moneywise.

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