Rising Interest Rates, What Does This Mean for the Buyers and for the Sellers?

Rising Interest Rates, What Does This Mean for the Buyers and for the Sellers?

  • Maureen Lathrop
  • 07/13/22

Summit County, CO, is one of America's hidden gems as it fulfills everything about mountain living. The sun begins its steady ascend over the snow-capped Colorado Rockies with a bright shade of pink with a tincture of red shooting across the open sky to shake off nighttime frost. Colorado mountain living is a mountain-lovers dream, with the crisp alpine air starting off your day.

The year-round recreational opportunities combined with the ability to work remotely have created a booming luxury real estate in Summit County. Silverthorne, Frisco, and Breckenridge carry some of the most top-dollar homes in the county. However, rising interest rates, inflation, and short-term regulations have affected real estate growth in the county and the country at large.

According to Summit Daily, Summit County broke the sales record with $3.05 billion in 2021, surpassing 2020’s number of sales tallied at $2.32 billion. Although there has been a 32% increase within a year, the rising interest rates in the real estate market in Summit County will affect the buyer and the seller.

How High-interest Rates Affect Real Estate Agents and Homebuyers

In the US, interest rates are determined by various factors, including the economy's health, how people are saving money, and the actions of the US Federal Reserve. Most affluent people like taking out mortgages to purchase their homes, even if the move may seem counteractive. For high-net-worth individuals, it makes sense to take on a debt to buy a home because it will mean more money for investment purposes.

Despite the ups and downs associated with owning a real estate property, luxury real estate grows in value. Luxury property investments have been known to perform well even during an increase in a country's interest rate. An unstable economy presents the affluent with an opportunity to take advantage of the current interest rates to buy their dream homes.

High-end real estate does not play by the same rules as other real estate markets. For example, wealthy investors who purchase properties during inflation do not take the same considerations an ordinary home buyer or seller would make.

However, this does not make luxury real estate immune from the effects of inflation. According to CNBC, the wealthy and affluent raised inflation as the second threat to their personal wealth as it increased the cost of borrowing, putting pressure on their asset value. The real estate market can encounter high interest rates through external forces, affecting real estate agents and buyers.

A real estate agent will be affected by an interest rate hike, as the cost of building materials and human capital will significantly increase. You'll be required to allocate more funds for the same amount of work or materials used. In addition, interest rate hikes will cause banks to increase their lending rates. This domino effect results in homes being priced much higher.

During inflation, most people will opt to rent rather than buy. So, if you are wise during this season, offer competitive mortgage rates to attract homebuyers to your listings. Below are some of the external forces that cause rising interest rate, which in turn affects the luxury real estate market;

1. Interest Rates and Taxes

Photo courtesy of Pexels

To an extent, a high-net-worth individual looking to invest in the real estate market is insulated by various factors from the rising mortgage interest rates which impact an ordinary homebuyer. Most wealthy people can afford to buy their homes upfront with cash, but prefer mortgages for financial management purposes.

In 2018, the US introduced changes to the US tax code, which impacted every real estate sector, including luxury real estate. The new limits on the deduction for mortgage interest and property taxes dissuade local and foreign investors from investing in states that have imposed high property and income taxes.

For people looking to buy expensive real estate, property taxes are crucial. Unfortunately, the upper-end market has imposed a mansion tax burden when buying exclusive properties. This will affect the willingness of the affluent to get involved in certain home investment projects.

2. Stock Market Fluctuations

The stock market's volatility discourages some potential homebuyers from purchasing luxury homes due to the unknown factor. According to CNBC, in 2018, the stock market dropped mortgage applications by 2.5%. The degree of the stock market's volatility depends on various factors, including changes in inflation rates and political and economic factors.

For affluent investors, volatility encourages some to find more stable avenues for investing in real estate. In this case, working with a certified and qualified real estate agent who has a deep and vast knowledge of trends like Maureen Lathrop will allow you to make sound decisions.

When people become wealthy because of stock gains, they will most likely spend on opulent homes. Even during an economic crisis, the luxury real estate sector tends to bounce back faster. You can contribute it to the wealthy stock owners who manage to take advantage of a stock market crash.

If the stock market's crash is more pronounced, an upscale investor avoids making large property purchases. Some regions like San Francisco are more prone to be affected by stock market swings because the area is a high stock market trader. So, when the Dow goes low, their wealth is highly affected.

3. Foreign Investment

Foreign buyers of luxury real estate largely contribute to the industry's growth. Investing in real estate in a foreign country offers numerous benefits, including tax advantages, predictable cash flows, excellent returns, and the ability to leverage your property to create wealth.

According to the National Association of Realtors, below are the top five countries that buy real estate in the US;

  • Canada - 8%
  • Mexico - 7%
  • China  - 6%
  • India  - 4%
  • United Kingdom - 4%
When overseas buyers slow down their investment, it can affect the luxury real estate market. This is because most overseas buyers buy these homes as their second homes, vacation homes, or are looking to invest in the real estate market in the US. In addition to the strict government rules, increased interest rates affect the exchange rates, which discourages investors from investing in the country, as the currency exchange does not favor them.

Interest Rates and Their Effects

The US Federal  Reserve increases the federal fund rate as a way of reducing inflation, resulting in the country experiencing high interest rates. High interest rates increase the cost of borrowing, resulting in reduced disposable income. This limits consumer spending and earnings, which in turn slows down economic growth.

If the interest rates go high, you cannot get a loan to purchase a home in Summit County on favorable terms. This is because the raised interest rates are discouraging or limiting your spending. As a result, a homebuyer's cost of buying real estate increases while the real estate agent reaps the benefits of the increased rates on their property.Below are some effects of increased interest rates;

1. Increased Rate of Mortgage Repayment

Acquiring your real estate property with a mortgage when the country has a stable economy is an excellent idea. It's an inexpensive debt with low-interest rates that allows you to live or own your dream property.

However, when the interest rates are high, real estate agents will price their property higher to match their personal and discretionary business income. Discretionary income is money available to spend from your disposable income on rent, utility bills, and other expenses.

Increased interest rates cause expensive mortgage repayment, reducing your discretionary income and that of a real estate agent. On the other hand, raised interest rates will likely affect your disposable income–your personal money after your income tax and other state contributions are deducted. The cumulative effect of this increase will make paying mortgages more expensive.

2. Increased Cost of Borrowing

Your loan repayments will significantly increase as the banks impose higher interest rates. As a result, you will refrain from spending and borrowing to reduce your debts. All other areas of consumption will also be affected depending on your lifestyle.

For example, if you love purchasing properties for higher resale value, you will spend less on the ventures as you perceive the market to be unstable. However, your market analyzer can tell you when to invest, even when the market seems unpredictable.

3. Slower Economic Growth

When the country experiences rising rates, real estate home buyers are less willing to buy homes as they are priced more. If you were purchasing the property as an investment, you are skeptical of getting a rewarding return. In addition, people are less willing to invest their money into the economy, so the country has a slow economic growth rate, making home investments less desirable.

A rise in interest rates affects people differently, based on their financial capability and economic understanding that empowers them to predict the future of the real estate market.

Experience the Colorado Mountain Living

Colorado Mountain Living is your perfect Summit County real estate concierge as she has excellent market skills. If you are looking to sell your house, Maureen can help you determine how much your property is worth. In addition, if you're looking to buy a property, she will provide you with exclusive listings for the best luxury homes in Summit County. Contact us for more information.

Work With Us

We bring an unusual and compelling mix of expertise and character to Summit County real estate that benefits you and your search for the perfect mountain home. Beyond being listener, we are anticipator - connecting with clients to understand their needs and always staying one step ahead.