How Will Higher Interest Rates Impact the Alabama Real Estate Market?

The Federal Reserve recently announced an increase in key interest rate by three-quarters of a point. This is the largest hike in almost three decades. The move is expected to increase the benchmark short-term rates. More interest rate hikes are also expected in the foreseeable future. This will affect many business loans and consumers. So, what does this mean for someone looking to purchase a home in Alabama? Let us take a look.

Impact of Interest Rate Hike on the Real Estate Market

Larger interest rates are expected to bring some semblance of balance back to the real estate market in Alabama. Currently, Alabama ranks 49 out of 50 states for low property taxes. The hike is expected to drive an investor-rich market which may take a few homebuyers off the market.

It may be a smart move to take out a loan for refinancing an apartment complex, purchasing a multifamily property, or a traditional house. Pertaining to this, there are always other factors at play besides interest rates. These are a few factors that are expected to be affected by the hike in key interest rates:

A shift in demography, supply, and demand

Real estate inventory, especially affordable housing is low. Demand is outpacing supply in several cities of Alabama. More people are expected to go out as the economy opens up again. A move from the suburbs to cities is expected. An increasing number of people are moving to the center of the country for seeking workforce housing.

Local market

Real estate is a local business. Any investor should take a closer look at the individual specifics of their local market before refinancing or purchasing. It’s critical that you don’t forget to evaluate a property’s capitalization rate. This is something that generally increases with interest rates.

Financing structure

Hikes in interest rates may have more of an impact on short-term loans as compared to long-term ones. Variable rate financing may have the same effect. You may want to keep your eye on the 10-year Treasury yield. This helps in determining mortgage rates. This yield is seen as a sign of investor sentiment regarding the economy. Rising yields usually reflect higher levels of expected inflation while falling yields may indicate lower inflation. Falling yields indicate the possibility of recession or slowdown as well.

Home Prices May or May Not Fall

The biggest point of discussion in the housing market across the country for the past two years is whether or not house prices are going to increase. The hike in interest rates has only fanned the conversational flames. Generally, rising mortgage and interest rates tamp down the home-buying process. This is because competition decreases as a result of higher borrowing costs.

With inflation at its highest and home inventory in Alabama at an unprecedented low, experts think that home prices may not fall.  Prices of both residential and commercial properties alike are unlikely to fall. People may be willing to purchase a home at the listed price even with an expensive mortgage. This is because there aren’t many homes available on the market.

This may stabilize home prices as well since there will be fewer buyers that can afford or are willing to spend more money on houses. There is a lot of difference between a $250,000 house at a 3% interest rate and the same property at 5% or 6%. Both rates hit a monthly budget differently.

You can plan ahead and hire a professional real estate agent or attorney to get ahead of other investors. Getting prequalified for a mortgage can also help.

Home Buying Behavior of Millennials Is a Major Factor

According to research, a median first-time home buyer is in their thirties. Millennials currently occupy this cohort. The real estate investment behavior of millennials is going to indicate the broader health of the market. Millennials may or may not enter the housing market because of the rising interest rates.

This generation already holds less relative wealth as compared to previous generations. This is because they are disproportionately burdened by student debt and came of age during the Great Recession. Stemming from this, the construction of new homes slowed for several years because of the 2008 housing crash. The number of millennials making a good salary and at a house buying age may meet the supply of available properties.

Rising Mortgage Rates May Be Heating Up the Real Estate Market

Rising interest rates lead to rising mortgage rates. You would think this would be a deterrent. But, it just may be possible that the interest rate hike may be heating up the housing market. There is chatter that the interest rate hike is just the first of six other scheduled for the year. Even with the current increase, mortgage rates may still be at their lowest point for the foreseeable future, which could motivate buyers to jump in now before rates climb any further.

Legal Help is Here from Qualified Real Estate Attorneys in Alabama

With the increasing variability affecting the mortgage and real estate market in Alabama, it is recommended that you discuss your options with a knowledgeable and experienced real estate attorney. The legal team at Davis, Bingham, Hudson & Buckner, P.C. are here to answer all your questions and lend clarity to the situation. To schedule a free consultation, call us at (334) 821-1908 or fill out this online contact form.