How Higher Mortgage Rates Benefit the Housing Market (Podcast)

By: Craig Berry Reviewed By: Paul Centopani
August 23, 2023 - 3 min read

Almost always, people see higher mortgage rates as a burden on the housing market, making it more difficult and expensive for potential home buyers.

However, they can also boost the market’s long-term health.

In this episode of The Mortgage Reports Podcast, Craig Berry discusses just how that is true with lending professional Arjun Dhingra. Here’s what they had to say.

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Avoiding a bubble

It may seem counterintuitive, but higher mortgage rates can help normalize the housing market.

When rates are too low, it can create a frenzy of home buying and lead to inflated prices, as we saw in 2020 and 2021. This can ultimately result in a housing bubble that eventually bursts, causing a significant downturn in the market and possibly the entire economy.

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Higher rates help to prevent this by slowing down the buying activity and ensuring that property values remain more stable.

Additionally, higher mortgage rates can also help to weed out potential buyers who may not be financially ready to purchase a home. When rates are low, it can be tempting for individuals to buy a home even if they may not be fully prepared to take on the fiscal responsibility. With these fear-of-missing-out speculative buyers flushed from the market, price growth and competition deflate.

Creating non-obvious advantages

While higher mortgage rates hurt affordability, they also present an opportunity for home buyers that should not be overlooked.

We watched real estate become unhealthy and unsustainable in recent years, with prices soaring and houses selling within hours of being listed. This frenzy created an abnormal and inflated market — a detriment to both buyers and sellers.

Although still finding its footing, the current marketplace allows for a more reasonable and measured buying process. Homes are sitting on the market for longer periods, and house hunters have the opportunity to negotiate with sellers.

Buyers can negotiate a lower sales price, credits to buy down their interest rate, or even repairs and additional incentives. This all adds up to securing a better (and fairer) deal.

Moreover, the interest rate itself is not as significant as it may seem. While buyers may initially be concerned about the increase in mortgage rates, the reality is that most people do not hold onto their mortgage for the full term. Refinancing and moving to a new home are common occurrences within a few years. Therefore, the interest rate becomes more of a placeholder than a long-term commitment.

Financial literacy is crucial

Berry and Dhingra highlight the need for individuals to have a thorough understanding of their financial situation and the decisions they make regarding debt and investments.

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The aftermath of the 2008 financial crisis revealed how misinformed people were about using debt instruments like mortgages to their advantage. This lack of knowledge can have serious consequences for borrowers and the overall economy.

Many individuals are unaware of the potential risks and benefits associated with taking on a mortgage. This can lead to miscalculated moves and poor decision-making, as seen during the housing market crash.

Overspending and consumer debt are big issues in the United States. The ease of access to credit cards and loans has led to a culture of spending beyond one’s means. This puts individuals at risk of falling into delinquency, forbearance and potentially foreclosure, as we saw nearly two decades ago.

The bottom line

On the surface, higher interest rates make home buying more expensive and slow down sales.

But they may be critical in returning the housing market to normalcy. Mortgage rate growth also creates opportunities for borrowers, including less competition and the ability to negotiate. Further, interest rates shouldn’t be seen as a permanent financial fixture, as you can always refinance or lock in a new rate if you move.

Lastly, understanding the home buying and mortgage process can prepare you for success. If you’re ready to start or continue your journey to homeownership, reach out to a local lender today.

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Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.
Paul Centopani
Reviewed By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.