Whenever I sit down with buyers or sellers, price is almost always the first topic. The second one, very often, is where mortgage rates are heading. That makes sense, because rates do far more than set a buyer’s monthly payment. When they move, the effects spread across the entire local market, touching sellers, inventory and competition along the way.

A Quick Look Back at Rates

Viewed over the last three decades or so, mortgage rates have generally drifted lower. Back in 1979, they hit 11.20%. By the beginning of 2020, the average 30-year fixed rate sat at 3.7%. The pandemic drove it down further, to 3.31% in April 2020 and then 2.65% by December 2020.

In 2021 rates started to climb again. On April 1 the average 30-year fixed rate was 3.18%, and by the middle of that month it had slipped back to 3.04%. The lesson is simple: whether you are buying or selling, it pays to keep an eye on rates.

When Rates Go Down

Falling rates give buyers more purchasing power, and that changes the market in a few ways.

More competition

With more buying power, some buyers reach for more expensive neighborhoods, which can lead to bidding wars there. Others look toward up-and-coming areas where homes may still be undervalued. Buyers with bigger budgets can end up outbidding the average buyer. Lower rates also tend to pull people who were sitting on the sidelines into the market.

What it means for sellers

For sellers, lower rates can translate into a quick sale. That is great news, but if you are not quite ready to move, or you need to sell and buy at the same time, you will want a backup plan. Short-term rentals and storage units are two options worth considering.

Sellers should also watch whether all that buyer activity convinces other homeowners to list. Inventory remains tight in many markets, and it is hard to know exactly when new listings might start to outnumber buyers.

Effects people tend to miss

  • Some homeowners who might have sold decide to refinance instead. That keeps inventory low, adds to competition and puts upward pressure on prices.
  • Some buyers hold off, hoping rates will drop even more. On its own this has little effect, unless a large number of buyers decide to wait at the same time.

Questions About What Is Happening in the Market?

The market never stands still, and you will hear plenty of people claim it is hotter than ever. My aim is to help buyers and sellers understand what is really going on so they can make good decisions. If you would like to stay informed, I share articles each month by email, and I promise not to clutter your inbox.

When Rates Go Up

How much a rate increase affects the local market depends largely on how big it is. A small bump can actually get buyers moving, since many want to lock in before rates rise further. A large jump, however, can price some buyers out, depending on their budget.

Buyers who are committed to purchasing may adjust by looking in areas where their money stretches further, or by paying points to bring their rate down. In general, though, rising rates tend to slow things down.

Where demand can hold up

There are exceptions. Affordable neighborhoods in desirable locations can keep attracting interest. Pricier areas and vacation destinations may continue to see strong demand from buyers paying cash.

What it means for sellers

The impact on sellers varies by market. If activity slows significantly, prices can soften and homes may take longer to sell. In that situation, sellers may need to make improvements or offer incentives to stand out. Sellers in the more resilient markets mentioned above may notice little change at all.

The Takeaway

Mortgage rates are usually framed as a buyer’s issue, but their movement shapes the whole market. If you would like to talk about what is happening in your area and how it affects your plans, reach out and let’s set up a time to chat.