Will Rising Interest Rates Affect the Housing Market?

With interest rates on the rise, now is a good time to look at how the housing market could be affected.

Historically, rising interest rates result in a drop in housing demand. However, with the pandemic-driven market and lack of supply, it can be speculated that the demand will not be affected by the increased interest rates. 

With supply dropping so steeply in such a short amount of time and demand for more space drastically increasing during the COVID-19 quarantine phase, there is now an unprecedented need for homes and little-to-no inventory to show for it. 

As home prices soar drastically due to the supply shortage, homebuyers may be tempted to compare this to the Great Recession housing bubble and expect the market to crash. However, the market differs significantly from that of 15 years ago. 

According to NextAdvisor, the issues mainly stem from supply and demand driving up prices, not predatory lending practices and bad borrowing – two main issues that led to the bubble of 2006.

In addition, builders are struggling to catch up to today’s demand. Between labor shortages, lumber and building material shortages, and all costs going up over the past decade, NextAdvisor reports there is a deficit of at least a million homes. 

So, will the rising interest rates kill the market?

John Hunt, of MarketNsight, suggests that for the first time ever, the demand for housing is so high above our ability to supply that any effect from rising interest rates will likely go unnoticed. 

“After a decade of underbuilding – and especially under developing – we find ourselves in an inventory crisis of epic proportions,” says Hunt. “For this reason, we believe any effect from rates rising even as high as 5% will be relatively muted.”