How High Will Interest Rates Go? Don't Let That Distract You | Guest Post

As interest rates hit 5.5 percent, buyers are seriously reconsidering what they can afford. Many are dropping out of the market for rentals, only to learn that rents are going up, too.
Nicole Rueth

The housing market in Colorado is so hot it's starting to feel untouchable to potential homebuyers.

There are multiple factors putting the market into overdrive: inventory is scarcer than it's ever been, mortgage loan interest rates are 2.5 percentage points higher than they were last year, and average home prices are setting new records.

For potential buyers, especially in red hot markets like Denver, housing is starting to seem out of reach. The Mile High City is now the 7th most expensive city in the U.S., with a typical home selling for $624,950. Homebuyers watch properties they eyeballed last year for $602,000 creep up to $680,000. As interest rates hit 5.5 percent, buyers are seriously reconsidering what they can afford. Many are dropping out of the market for rentals, only to learn that rents are going up, too.

The market defections aren't slowing the demand. When people leave Denver, they are quickly replaced by Californians, Chicagoans, Bostonians and others who are flushed with cash from doing well in cryptocurrency, business investments and the stock market. With 3,204 homes for sales, in a metro area of nearly 3 million people, the demand to live in a beautiful city like Denver will stay very competitive.

The Federal Reserve says it will combat inflation and cool down the economy by raising interest rates several times in the coming months, but the haste with which they're applying their strategy could cause panic in the market or a full-blown recession. If the latter happens, interest rates will fall again. Money will be cheap, and demand will be high.

Will Interest Rates Continue Rising Through 2022?

Yes, we are likely to see interest rates continue to rise through 2022, and this will be followed by a recession.

Now, interest rates — and home appreciation — won't go up as quickly over the next four months as they did the first four months of 2022. We're in this situation because people fear the Fed's reaction to inflation.

Interest rates don’t rise based on reality but on expectation. When reality matches the expectation, rates tend to settle into a groove, inching up ever so slightly from time to time. When reality doesn’t meet expectations — that's when rates get wonky.

What does this mean for a recession? Economist Julius Shiskin defined a recession as two consecutive quarters of declining GDP. We aren't quite there yet.

While the overall economy may have contracted in the first quarter of 2022, consumer spending, which is nearly 70 percent of GDP, increased by 3.7 percent from January to March. Even during this time of uncertainty, American shoppers are still buying name brands at higher rates, finding a way to pay for what they want even if it requires taking on a new line of credit.

While the Fed has done a reasonable job at sharing their plans ahead of time to avoid crashing the market, the interest rate increases are likely to cause a recession, but I suspect we'll see this happen in 2023, at which point rates will drop once again.

How Should Homebuyers React to Rising Interest Rates?

Homebuyers worried about interest rate increases should follow the age-old advice – get in the market now.

I get it. Purchase prices and interest rates are going up – and that's nerve-wracking! This can tear you away from your goal of homeownership. What really matters is what you can afford to pay. By putting away the rate charts, you'll free your mind to focus on the practical matter of finding a monthly payment that works for you. If rates go down after you sign, you can always refinance.

Start by having a conversation with a lender. The right time to talk to a lender is the first time you think about buying a house. As you develop your plans, think strategically. Below are three questions to ask yourself if you're considering options that aren't the ideal location or perfect home:

  1. Is it an opportunity for a future investment?
  2. Is it an opportunity to purchase a house for your future kids?
  3. Is it something that gets you to your end goal?

Once you establish your goals, you can head in the right direction.

Interest Rates Are Only One Piece of Homeownership Puzzle

While interest rates are important, they are only one piece of the homeownership puzzle. If you get caught up in a single factor dropping or rising, you'll lose sight of the overall strategy.

Focusing on whether interest rates will rise, and how high, distracts people from having a better conversation about the opportunity to have a roof over their head or equity development for their family.


The views, opinions and positions expressed within this guest post are those of the author alone and do not necessarily represent those of the Denver Metro Association of Realtors®. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.

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