What the rate increase means for estate agents

Stock markets and currency exchanges were instantly sent into a spin by the Fed’s decision this week to hike its base lending rate by 0,75% – the biggest increase in 28 years.

But the reaction in the real estate market is likely to be more of a long, slow burn, and agents should be prepared for the following trends, which are already evident to some extent, to strengthen over the next two years:

**Declining buyer affordability. Most households are already battling high inflation in the form of rocketing fuel and food prices, and the Fed’s rate hike is going to put even more strain on their budgets as it increases the repayments on debts such as car and college loans and credit card balances.

Consumers will be reluctant to create more debt, and even those who are prospective buyers are going to find it increasingly difficult to qualify for a mortgage that requires them to make a monthly repayment that is any higher than their current rental or mortgage instalment. In fact, with the Fed having made it clear that rates are set to keep climbing this year, most lenders will probably want them to pay even less to create some leeway and avoid foreclosures down the line.

And for agents, that translates directly into fewer and lower-priced sales in the coming months, as is already evident from the lower mortgage uptake being reported by most lenders. Indeed, the latest report from Fannie Mae predicts a 13,5% drop in home sales this year and a further 11,2% drop in 2023.

In the face of this, many of the large real estate groups are already laying off staff, and many estate agents can also be expected to leave the market voluntarily, as there will just not be enough profitable business to go around.  

**More forced sales. As rates continue to rise, more and more existing homeowners will have difficulty making their mortgage repayments each month, and this will lead to a rising number of forced or “distressed” sales as they scramble to sell their homes on the open market rather than face foreclosure by a lender.

This will lead to an increase in inventory at the same time as demand is declining, so properties for sale will attract fewer buyers and take longer to sell. The average differential between asking prices and selling prices can also be expected to increase as buyers increasingly perceive that they now have the upper hand once more.

For agents, this will mean more price counselling with sellers to get asking prices closer to the new market realities, and a need for excellent negotiating skills (and patience) in order to close deals. 

**Rising rents and slowing home prices. Rentals are likely to keep rising due to increased demand and diminishing inventory, but the rapid home price increases of the past two years will be a thing of the past – and in some areas the market could even go “flat”, with the rate of price increases slowing to 0%. 

However, barring a lengthy recession, that is the point at which the property cycle can be expected to start turning upwards again, and when things will start to look up for those agents that have weathered the current storm. The reasons are that lower prices always attract more investment buyers into the market, especially if rentals are up; that home buyer demand will also rise as rentals start to outpace mortgage repayments; that a lack of building activity during the downturn will limit the availability of new inventory and that there will be fewer agents competing for business.