When mortgage interest rates increase, a mortgage for a particular value costs homebuyers more. For example, person A might have taken out a 30-year fixed-rate mortgage of $300,000 with an interest rate of 2.5%, meaning they faced monthly payments of $1,449. But if the mortgage rate rose to 4%, this same mortgage would result in monthly payments of $1,696.
As mortgages become more expensive, it becomes less appealing to take one out in the first place, as we’ve seen already. This situation is a stark contrast to what home buyers faced in the US a year ago.
The effect of the rise in the federal funds rate on demand is two-pronged. On the one hand, the higher mortgage prices are likely to reduce demand for houses directly — but also, rising inflation has increased the cost of living, meaning there’s a lower number of people who can afford a home right now.
People have been talking about the “uncertainty of current times” over the past few years. For a while, it was the pandemic, and then rising inflation and geopolitical tensions came along to cause even more uncertainty.
Although uncertainty is almost always a bad thing for the stock market, it’s sometimes positive for the real estate market, often viewed as a “safe haven” from inflation. However, this also may not be true this time around.