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Rising Interest Rates – What Does It Mean?

In an attempt to combat inflation, the Federal Reserve began increasing interest rates. The goal is to cool down a super hot real estate market. If you’re a homeowner, you likely loved seeing the value of your home skyrocket over the last couple of years. However, if you’re a tenant looking to buy eventually, the outrageous pricing and bidding wars will naturally be discouraging.

How Are Interest Rates Affecting the Market?

Raising mortgage interest rates means a borrower will qualify for a lower loan amount. Higher interest rates also mean a buyer who buys a home for $300,000 will pay significantly more for the house over the loan period than a buyer who paid the same price six months ago. 

We are faced with a unique situation in the market today, however. There’s an inventory shortage which keeps the demand for homes high. When you apply the basic principle of supply and demand, the result is higher than regular home prices due to the limited number of options. The market is competitive. New homes take longer to build because of supply chain issues and labor shortages, so even that option is limited. The combination of low inventory, double-digit price increases, and a dramatic rise in mortgage rates has taken a toll on home sales across the country.

According to data from the Census Bureau, new home sales were down 12.6 percent in March compared to sales in March 2021. Sales may be down, but prices seem to remain strong. We don’t expect values to jump in leaps and bounds like last year. In Virginia, the median sales price rose 9.4% year-over-year in 2021. Experts anticipate prices to increase by less than half that amount, approximately 4.1%, in 2022. 

How Rising Rates Affect Buyers

With high-interest rates, buyers are deterred from buying or may not qualify. The rate of homebuying tapers off because, with each rate high, the homes become less and less affordable. When the demand decreases, the price naturally decreases as well. Buyers eager to sell have no choice but to lower their prices, bringing down comparable home sales in the area. The next home that goes up for sale in the area is automatically listed lower when an agent pulls data on similar sales. Supply and demand forces here work against each other to level out sales volume and prices.

Market Analysis for Virginia

What does all this mean for the Virginia housing market? Real estate is a super localized asset. Some markets haven’t seen a slowdown in home buying yet, even as interest rates soar. Despite a slowdown in new mortgage activity, cash buyers continue to drive up prices in some areas. Virginia’s median home sale price was $375,000 in March 2022, about 12 percent higher than last March.

In Northern Virginia, for example, prices also remain high. The Northern Virginia Association of Realtors reports that the average price of a single-family in April was just under $1.1 million. Homes sold in an average of 11 days on the market, which is even faster than in April 2021, when homes spent an average of 14 days on the market. Although this seems to be good news for sellers, home sales are down 13 percent from last year. This slowdown indicates that change is coming. Although we cannot predict the future, we know it could become a buyer’s market if more sellers begin listing their homes. 

Takeaway

You may be wondering – what does all this mean for the Virginia housing market? Real estate is a super localized asset. Some markets haven’t seen a slowdown in home buying yet, even as interest rates soar. Despite a slowdown in new mortgage activity, cash buyers continue to drive up prices in some areas. Virginia’s median home sale price was $375,000 in March 2022, about 12 percent higher than last March.

In Northern Virginia, for example, prices also remain high. The Northern Virginia Association of Realtors reports that the average price of a single-family in April was just under $1.1 million. Homes sold in an average of 11 days on the market, which is even faster than in April 2021, when homes spent an average of 14 days on the market. Although this seems to be good news for sellers, home sales are down 13 percent from last year. This slowdown indicates that change is coming. Although we cannot predict the future, we know it could become a buyer’s market if more sellers begin listing their homes and competition decreases due to increasing interest rates.

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