What to Expect When Interest Rates Go Up

by | BiggerPockets.com

With mortgage rates at record lows, and the housing market entering a period of prolonged stability, the rate of home purchases across the country has picked up drastically. Housing prices are escalating with exceptional speed, and have done so in regions with such drastic swiftness that it’s causing concerns around property market stability. Taking all this into consideration, there’s a respectable chance interest rates may be lifted before the close of the year, especially if policymakers are concerned with steadying the ongoing recovery.

That being said, it’s always well advised for homeowners to stay aware of the consequences (positive and negative) of elevated interest rates. Forbes recently published a piece from Investopedia that details the repercussions of rising interest rates. In terms of housing market impact, the possibilities are manifold.

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The Good

As an overarching market theme, those with interest-based investments tend to draw elevated financial gains into their portfolios. As a general trend, older investors tend to own a greater volume of interest-based investments, and the elevation of interest rates leaves many boomers in securer hands for retirement. As the current generation of pending retirees gets the chance to exhale and prepare for their golden years, they’re more liable to sell their existing properties and move into homes for the next stage of their lives. A threshold of houses that had been kept from the seller’s market may enter the field, having a mediating impact on regional housing prices, even to the point of proving inviting for 30-somethings who might otherwise be turned away by higher property values.

The Complicated

With interest rates having remained suppressed at low rates for as long as they have, there’s a chance that many of those considering mortgages, or currently managing one, may not be entirely prepared for an elevation in interested rates. For homeowners currently holding an adjustable-rate mortgage, there might be swift moves to refinance prior to an expectation in the rise of interest rates. Alternately, considering much recent economic forecasting, there’s a chance that current homeowners may want to consider the opportunity to refinance their interest rates before interest rates ascend.

Additionally, with interest rates likely to rise, there may be a move towards fixed-rate above adjustable rate mortgages. Fixed-rate mortgages, thought tied to the valuation of US Treasury bonds, provide an arguably greater degree of rate stability in the face of future elevation in interest rates. Adjustable-rate mortgages generally involve greater diversity in the number of variables that determine their interest rate. Considering that the market indexes (as opposed to financial barometers in the hands of the public sector) stand as a major anchor of adjustable rate mortgages, they might yield greater levels of volatility, especially when combined with a still-recovering economy and climbing federal interest rates.

Ultimately, these concerns will only become concrete when the Federal Reserve decides to elevate the national interest rate. Until then, both current homeowners and prospective buyers have some leeway to determine how to handle their home loans in anticipation.

Photo: Pensiero

About Author

Harrison Stowe is a writer for NVR Inc., a prime developer of Baltimore new homes. Addressing a range of topics including investing, mortgages, and real estate, Stowe combines finance knowledge with additional experience working with Ryan Homes in the current real estate market.


  1. karen rittenhouse

    Hi Harrison:
    If rates begin to creep up, there could be a spike in homebuying because people will finally believe rates are going to rise. At this time, as you pointed out, rates have been down for so long that many now take this as the “norm” rather than as a gift.

    A lot of things will shift with rate increases and increase is inevitable if we want to get out of our financial crisis. I don’t think rates should have been held this low for so long, but then, I’m a real estate investor and not in charge of such things. My responsibility is to my portfolio which means staying aware and being prepared for the change when it comes.

    Thanks for your post.

    • Karen,

      I’m curious if investors in different regions see the cause and effect differently. Our market is increasing so fast (35% over 1 year, lowest days on market in the US according to NAR) that there are too many investors and people are holding onto their properties and waiting to see if they should dump them or go the short sale route.

      I was thinking that rising interest rates would slow down demand, flatten out appreciation rates, and increase days on market making it harder to sell your house. I thought the above would only help investors.

      • Adam:

        What area of the country are you in? Are you saying you’ve had a 35% increase in property values in 1 year?

        Yes, investing is very definitely local so there is tremendous variation across the country. We have been investors through all kinds of financial ups and downs and, to me, it’s always a fantastic time to be investing through real estate, you just have to stay informed and be prepared to change your strategy.

        • Fresno, CA, its 3 hours south of San Fran, and 4 hours north of LA. It has to be one of the most volatile markets in the US.

          Example, for my home. (i’ve been in real estate since 2003)

          1998 = $110,000 (avg homes at this time 90-110)
          2004 = $275,000 (year I purchased)
          2006 = $350,000 (I sold my neighbors house across street for $395,000)
          2009 = $160,000
          2011 = $170,000
          Today = $240,000, quickly heading to $250K

          I also bought a home in 2001 for $135,000 and sold it in 2004 for $295,000 (about 28 months)

  2. Wow, Adam, you’ve made my head spin.

    So, in 2013, your house is worth just under what you paid in 2004. We’re up about 16% since then. Slow and steady wins the race!

    Investing in your area is a bit like guessing the stock market. Good luck to you!

    • Yes it’s kinda a nightmare for an RE agent. However, I’m hoping that being disciplined and buying for the right price and selling it quickly will allow me to avoid the good and bad of the market.

      Before 2003, our market was as steady as a clock. Probably only 1-2% appreciation per year.

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