As interest rates continue to rise, the real estate market is feeling the impact. Higher interest rates make borrowing more expensive, which can dampen housing market activity. This can lead to a decrease in demand for homes, which can cause home prices to drop.

According to a recent study, 14 million homeowners refinanced their mortgages between the second quarter of 2020 and the end of 2021, before mortgage rates began to climb in 2022. With significantly higher mortgage rates persisting today, the report states that this “leaves homeowners somewhat disincentivized to sell or change properties.” The report notes that owners looking to sell their existing home and purchase another property “will face increased borrowing costs and higher (home) prices.”

Mortgage rates remain high, with the average 30-year mortgage rate in the U.S. standing at 6.39% as of mid-May 2023. This can make it more difficult for potential homebuyers to afford a home, which can lead to a decrease in demand for homes.

Real estate as an asset class was one of the first to be repriced lower in reaction to higher interest rates. Although REITs are often considered a way to hedge the risk of higher inflation, the unfavorable interest rate environment resulted in REITs underperforming other parts of the equity market. Improved yields on U.S. Treasury securities create cash flows that look much more attractive in today’s market, when compared to REITs. As a result, demand for REITs has fallen, at least in the near term.

The impact of interest rates on the real estate market is complex and multifaceted. While higher interest rates can lead to a decrease in demand for homes and a drop in home prices, they can also lead to improved yields on U.S. Treasury securities, which can be attractive to investors. As the real estate market continues to adjust to rising interest rates, it will be important to closely monitor its trends and movements.