Interest rates on 30-year fixed mortgages have been at historic lows since the pandemic took hold of the U.S. in 2020.1 But experts say those lows won’t last. As the economy recovers, mortgage interest rates—and inflation—are predicted to rise. What can you say to help potential homebuyers feel confident about purchasing a home as interest rates rise?
What rising interest rates usually mean.
Historically, rising interest rates mean a more expensive mortgage and lower affordability. Buyers become worried about affording monthly payments, and the demand for housing slows. When buyers can’t afford to spend as much on a home, sellers may have to price their homes lower.
But while mortgages have a close association with interest rates, it’s not always a direct correlation. Low interest rates certainly raise demand for houses, which increases their price. But if those prices get too high, demand abates and the market plummets.
If the economy grows fast enough, rising mortgage rates won’t affect the housing market as significantly. A more robust economy means better wages, and therefore more money to make higher mortgage payments.
When rates rise, so do rents—and inflation.
Higher housing interest rates affect more than just homebuyers. They also impact renters. When fewer people can afford to purchase a home due to high mortgage interest rates, rents increase. Fewer real estate transactions take place, making lending standards more stringent. This results in more people needing (high-priced) rental properties while they wait until they can afford or qualify to buy a house.
Rent prices were already rising before the pandemic. Now that jobs are returning and vacancies are falling, rent increase rates may rise once again.2
Inflation is also rising, which can also increase interest rates. During the height of the pandemic in 2020, the consumer price index was at almost zero. In previous years, it’s risen 1.7% thanks to higher prices for things like healthcare and utilities.3
Prices in April 2021 rose 4.2% year over year, the biggest such gain since September 2008. But while inflation jumped, a 30-year mortgage remained at around 3%.4 This was the first time since 1980 that inflation burned brighter than mortgage rates. Meanwhile, home prices rose 15%5 in February 2021, at the fastest pace in nearly seven years.
What can you tell potential homebuyers about rising interest rates?
Despite the recent rise, interest rates are still at historic lows. Homebuyers can expect fits and starts, not suddenly skyrocketing rates. While mortgage rates are still likely to rise over the long term, it could be 2022 before they hit pre-COVID levels.
And while the annual average for a 30-year fixed mortgage hasn’t been as high as 5% since 2009, a 5% interest rate is still good. It was at 6.41% in 2006, 7.81% in 1996, and a whopping 10.19% in 1986.6 Mortgage rates, while rising, are still borrower-friendly when compared historically.
Borrowers might want to lock in these good rates sooner rather than later.