What Real Estate Agents Need to Know about Rising Interest Rates

Rising Interest Rates Hurt Real Estate Businesses – Here’s Why

What real estate agents need to know about rising interest rates is that the higher interest rates go, the harder it is for prospective buyers to afford the monthly payments.

Rising Interest Rates Have a “One-Two” Punch Effect on Real Estate Businesses and Real Estate Brokerages

1. Potential home buyers can’t afford to spend as much on a home because higher interest rates make the monthly payments to go up exponentially. This makes it hard for home buyers to pay what home sellers are asking because they can’t afford the monthly payment. This reduces the overall number of homes sold.
2. Home sellers might find themselves “upside down” when interest rates rise. If they paid top dollar for their home when interest rates were low (because they could afford the monthly payment), they might not be able to reduce the price of their home to the point where a new buyer can afford their monthly payments because of higher interest rates. This causes sellers to take their homes off the market, either wait for interest rates to decline, or to rent their home rather than sell it.

As a result, buyers can’t afford to spend as much on homes, which reduces home sales. Sellers who can’t reduce their home’s price enough to meet buyers’ ability to pay, often take their homes off the market, which reduces inventory in the marketplace.

Both make buying and/or selling a home harder. What this equates to for real estate agents and brokers is fewer listings coming in from sellers, and fewer homes closing. Both are bad news for real estate agents and real estate brokerages.

What were the lowest mortgage rates in history?

In January 2021, a 30-year fixed-rate mortgage was 2.65%, the lowest in history.

What Are Mortgage Rates in 2023?

Mortgage rates have slowly increased as the Federal Reserve Bank tries to tamp down runaway inflation. As of late May 2023, the average 30-year fixed mortgage rate was 6.39%.

What Impact Do Rising Interest Rates Have on Monthly Mortgage Payments?

Let’s calculate the monthly payments on a $500,000 house when interest rates go from 4% to 7%.

For simplicity, we’ll assume a 30-year fixed-rate mortgage. To calculate the monthly payment, we can use the formula for calculating the monthly payment on a fixed-rate mortgage.

At 4% interest rate:

• Loan amount: $500,000
• Interest rate: 4%
• Loan term: 30 years (360 months)

Monthly Payment ≈ $2,387

Now, let’s calculate the monthly payments when the interest rate increases to 7%.

At 7% interest rate:

• Loan amount: $500,000
• Interest rate: 7%
• Loan term: 30 years (360 months)

Monthly Payment ≈ $3,322

As you can see, if interest rates go up only 3%, from 4% to 7%, the monthly payment on a $500,000 house would increase from approximately $2,387 to $3,322.

And if interest rates went from 4% up to 8.5%:

• Loan amount: $500,000
• Interest rate: 8.5%
• Loan term: 30 years (360 months)

Monthly Payment ≈ $3,764

If interest rates rose from 4% to 8.5%, the monthly payment on a $500,000 house would increase from approximately $2,387 up to $3,764 – for the same house! That is a 63% increase in the monthly payment on a $500,000 home.

The higher interest rates go, there is a dramatic increase in the monthly payments required to service the mortgage, even though the price of the house hasn’t changed at all. Many people might be able to afford a $2,387 monthly payment on their home, but how many people can afford to pay $3,764 per month on that same home?

How High Can Interest Rates Go When the Federal Reserve Bank is Trying to Tame Inflation?

In 2023 there are a lot of financial experts trying to guess how high the Federal Reserve will raise interest rates. But the truth is – nobody knows for certain, not even the Federal Reserve Bank. Historically, interest rates have reached as high as 20% (in the 1980s). If that happened again, a 30 year fixed rate mortgage interest rate would probably be around 25%. How much home can people afford then?

Why did interest rates go so high in the 1980s? Runaway inflation. What is the Federal Reserve Bank trying to do in 2023 by raising interest rates? Tamp down runaway inflation.

Here are some historical facts about rising interest rates worth considering:

1. 1980: In an effort to control high inflation, the Federal Reserve implemented significant interest rate hikes. The target range for the federal funds rate was increased from 14% in January 1980 to its highest ever level of 19-20% by December 1980.
2. 1994: To curb inflationary pressures, the Federal Reserve raised interest rates multiple times throughout the year. The federal funds rate increased from 3% in early 1994 to 6% by the end of the year.
3. 2004-2006: In response to concerns about rising inflation, the Federal Reserve embarked on a series of interest rate hikes during this period. The federal funds rate was raised gradually from 1% in mid-2004 to 5.25% by mid-2006.

Nobody knows how high the Fed will push interest rates – but one thing is certain, Americans are highly concerned about runaway inflation, and the Fed has indicated it will do “whatever it takes” to stop it.

Sources: Forbes “Federal Funds Rate History 1990 to 2023”

Please note that the information provided is a general overview and may not include every instance of interest rate hikes by the Federal Reserve for the purpose of reducing inflation.

Why Rising Interest Rates Make It Harder To Purchase A Home?

When interest rates rise, it becomes harder to purchase a home for the following reasons:

1. Increased Mortgage Payments: When you take out a mortgage to finance your home purchase, the interest rate determines how much interest you’ll pay on the loan. When interest rates go up, the cost of borrowing money increases. As a result, your monthly mortgage payments will also increase to cover the higher interest charges. These higher mortgage payments can make it more challenging for buyers to afford homes within their budget.
2. Reduced Affordability: Rising interest rates directly impact the affordability of homes. As mortgage rates increase, the amount of money you can borrow while keeping your monthly payments within a certain budget decreases. This reduced borrowing power can limit your options and make it harder to find a home that meets your needs without stretching your budget too thin.
3. Higher Down Payment Requirements: Lenders may tighten their lending standards in response to rising interest rates. They may require larger down payments to mitigate the risk associated with higher borrowing costs. A larger down payment means you need to have more cash upfront to secure a loan, making it more challenging for some buyers to accumulate the necessary funds.
4. Decreased Buyer Demand: Higher interest rates can lead to a decrease in buyer demand as potential homebuyers may be deterred by the increased cost of borrowing. When the pool of prospective buyers shrinks, sellers may have a harder time selling their homes quickly and at the desired price. This reduced demand can lead to a less competitive market and potentially impact property values.
5. Slower Property Price Growth: Rising interest rates can put downward pressure on property prices. When the cost of borrowing increases, fewer buyers are able to afford homes, which can dampen buyer demand. This decreased demand can slow down property price growth or even lead to price declines in some markets. Sellers may need to adjust their price expectations accordingly.
6. Tightening Lending Standards: In the real estate market, one of the causes of runaway inflation is that over time when things are going well, banks tend to lower their lending standards to keep lending money to buyers. But when interest rates begin to rise, banks often tighten their lending standards, and only loan money to the most credit worthy borrowers. If the banks won’t loan your potential buyer the money, real estate agents and brokers make fewer sales.

The bottom line is, as interest rates go up, home buying goes down (as does home selling). This can be a tough situation for real estate agents and real estate brokers to navigate.

The Federal Reserve raises interest rates for several reasons, all aimed at managing the economy and maintaining stability

Here are some common reasons The Federal Reserve Raises Interest Rates:

1. Controlling Inflation: One primary reason for raising interest rates is to control inflation. By increasing interest rates, the Federal Reserve aims to reduce the amount of money in circulation and curb excessive borrowing, which can lead to rising prices and inflationary pressures.
2. Managing Economic Growth: The Federal Reserve may raise interest rates to manage economic growth. When the economy is growing too quickly, higher interest rates can help slow down spending and investment, preventing the economy from overheating and potentially causing imbalances.
3. Maintaining Financial Stability: Raising interest rates can contribute to financial stability by encouraging responsible lending practices and reducing the risk of asset bubbles. Higher interest rates can deter excessive borrowing and speculative investments, promoting a healthier financial system.

It is important to note that interest rate decisions are made based on careful analysis of economic indicators and considerations of various factors impacting the overall economy. The Federal Reserve considers a range of factors, including employment levels, inflation, GDP growth, and financial market conditions when determining whether to raise or lower interest rates.

A Deeper Explanation of Why the Federal Reserve Raises Interest Rates

1. Controlling Inflation: When the economy experiences rapid growth, there is a risk of inflation, which refers to the general increase in prices of goods and services over time. By raising interest rates, the Federal Reserve aims to reduce the money supply and borrowing, making it more expensive for individuals and businesses to obtain credit. This decrease in borrowing and spending helps cool down the economy and mitigate inflationary pressures.
   
   When interest rates increase, consumers and businesses may be less inclined to take out loans or make large purchases, as the cost of borrowing becomes higher. This reduced demand for goods and services can help prevent an excessive increase in prices and maintain price stability.

2. Managing Economic Growth: The Federal Reserve uses interest rates as a tool to manage economic growth by influencing spending and investment levels. When the economy is growing too quickly, it can lead to unsustainable levels of consumption and investment, potentially causing imbalances such as asset bubbles or overheating.
   
   By raising interest rates, the Federal Reserve aims to slow down economic activity. Higher interest rates make borrowing more expensive, which can discourage individuals and businesses from taking on new debt or making large investments. This reduction in spending and investment helps moderate economic growth and prevent potential risks and imbalances in the economy.
   
3. Maintaining Financial Stability: The Federal Reserve also considers the role of interest rates in maintaining financial stability. When interest rates are low for an extended period, it can incentivize excessive borrowing and risky lending practices, potentially leading to financial instability.
   
   By raising interest rates, the Federal Reserve encourages responsible lending and borrowing practices. Higher interest rates make it more costly to borrow money, which can discourage excessive borrowing and speculative investments. This helps reduce the risk of asset bubbles, where the prices of certain assets become disconnected from their underlying value, and promotes a healthier and more stable financial system.

Overall, the Federal Reserve adjusts interest rates to address concerns related to inflation, economic growth, and financial stability. By utilizing interest rate policy, they aim to promote sustainable economic conditions, price stability, and a stable financial system.

How Raising Interest Rates Can Help Reduce Inflation

1. Curbing Borrowing and Spending: When the central bank raises interest rates, it becomes more expensive for individuals and businesses to borrow money. Higher borrowing costs discourage excessive borrowing and spending, as the increased interest payments make loans less attractive. This reduction in borrowing and spending helps to moderate aggregate demand in the economy, which can help alleviate inflationary pressures.
2. Encouraging Saving: Higher interest rates make saving more attractive by providing higher returns on savings accounts and other interest-bearing investments. As interest rates rise, individuals may choose to save more of their income rather than spend it immediately. Increased saving reduces consumption, which can help reduce demand-pull inflation, where excessive spending drives up prices.
3. Reducing Investment: When interest rates rise, the cost of financing investments increases. Businesses may be less inclined to undertake new capital projects or expand their operations due to the higher cost of borrowing. This reduction in investment can lead to decreased demand for resources and goods, helping to mitigate inflationary pressures.
4. Strengthening Currency: Raising interest rates can make a country’s currency more attractive to foreign investors. Higher interest rates increase the returns on investments denominated in that currency, driving capital inflows and strengthening the currency’s value. A stronger currency can help lower import prices, contributing to reduced inflationary pressures.
5. Managing Inflation Expectations: The central bank’s decision to raise interest rates sends a signal to the market that it is committed to controlling inflation. By taking decisive action to tighten monetary policy, the central bank aims to influence inflation expectations. When individuals and businesses anticipate that inflation will be kept in check, they may adjust their price-setting behavior accordingly, mitigating the risk of spiraling inflationary expectations.

It is important to note that the effectiveness of raising interest rates as a tool to reduce inflation depends on various factors, including the overall state of the economy, inflation expectations, and other macroeconomic conditions. The Federal Reserve and other central banks closely monitor these factors to determine appropriate interest rate adjustments.

If I own a real estate business and interest rates are rising, what actions should I take to keep my business growing?

If you want to take an in-depth look at strategies real estate agents and brokers can use to survive a recession, please read our article: Surviving a Recession: 3 Tips for Real Estate Agents.

Basic Things Real Estate Agents and Real Estate Brokers Can Do to Survive a Recession

But in general, here are some basic things real estate agents and real estate brokers can do to help make sure they survive a recession.

1. Monitor Market Trends: Stay informed about the latest market trends and keep a close eye on how rising interest rates are impacting the real estate industry. Analyze how the changes in interest rates are affecting buyer demand, mortgage rates, and property prices in your target market. Adjust your strategies accordingly to capitalize on emerging opportunities or mitigate potential risks.
2. Offer Flexible Financing Options: Rising interest rates can make it more challenging for buyers to afford homes. Consider offering flexible financing options to attract potential buyers who may be hesitant due to higher borrowing costs. Explore creative financing solutions such as seller financing, lease-to-own agreements, or partnering with financial institutions to offer competitive loan programs.
3. Focus on Targeted Marketing: In a rising interest rate environment, it’s crucial to refine your marketing efforts and target specific buyer segments that may be less affected by the rate hikes. For example, focus on first-time homebuyers, investors seeking rental properties, or buyers looking for alternative financing options. Tailor your marketing messages and campaigns to address their specific needs and concerns.
4. Enhance Customer Education: Educate your clients and prospective buyers about the impact of rising interest rates on the affordability of homes. Provide them with information on how to navigate the changing interest rate environment and guide them toward suitable financing options. By being a trusted source of knowledge and support, you can build stronger relationships and attract more clients.
5. Diversify Your Offerings: Consider diversifying your real estate business to include different types of properties or investment opportunities. For instance, you could explore commercial real estate, rental properties, or alternative real estate investments such as real estate investment trusts (REITs) or crowdfunding platforms. This diversification can help mitigate risks associated with fluctuations in the housing market.
6. Develop Strong Relationships: In a changing market, maintaining strong relationships with industry professionals such as lenders, mortgage brokers, and other real estate professionals becomes even more crucial. Collaborate with these partners to understand the evolving lending landscape and explore collaborative opportunities that can benefit both parties.
7. Continuously Adapt and Innovate: Stay agile and adapt your business strategies as the market evolves. Keep an eye on emerging technologies, industry trends, and customer preferences. Embrace digital tools and platforms to streamline processes, improve customer experiences, and reach a wider audience.

Summary: What Real Estate Agents Need to Know about Interest Rates

It is important for real estate agents and real estate brokers to understand the impact rising interest rates will have on their businesses. As interest rates go up, buyers can’t afford to purchase “as much house” because the increase in interest drives their monthly payments beyond what they can afford to spend.

In addition, when buyers can’t afford what the seller is asking, many times the seller will take their home “off of the market” and rent it out until interest rates improve and prices of home sales stabilize. This means fewer homes for sale and fewer listings for real estate agents and their brokerages.

As interest rates rise, banks tend to tighten their lending standards and only lend money to the most credit worthy buyers. This has the effect of reducing the number of buyers who can get a loan from the bank.

The bottom line is, as interest rates rise, most real estate businesses, including mortgage companies and banks, tend to take a beating. There are fewer homes for sale, fewer buyers who can afford them, and fewer banks who will loan money. All of this causes challenges for real estate agents and their brokerages.

The most important thing real estate agents and brokers should do when interest rates rise is to remain calm and strategize. Every real estate market is unique, and the impact of rising interest rates can vary. You may need to diversify or expand the size of the market you serve. You might have to work longer hours to make a fraction of the money you used to make in half the time.

But if you plan, strategize, execute, and work hard, you can survive rising interest rates and put yourself in an excellent position to capitalize when interest rates go back down, which they always do once inflation decelerates.

About Accel Real Estate Commission Advance

Accel Real Estate Commission Advance offers commission advances for real estate agents and real estate brokers. We are a direct funder, not a broker like most real estate commission advance companies. Because there’s no middleman involved, our fees are among the lowest in the industry, as we pass our savings on to you.

We factor numerous asset classes, helping attorneys, professional athletes, business owners, and of course real estate agents and brokers. Let Accel finance your next Real Estate Commission Advance.

How Real Estate Commission Advances Work

When a recession hits, one of the things that tends to happen is there are fewer closings, and they are further apart from each other. This can leave realtors and brokers on the sidelines while they wait for their next paycheck at closing.

One way to get your money faster is by using a real estate commission advance to get your money right away instead of waiting until closing.

When you sell a home, you are owed your commission. That commission is considered an asset – just like a stock or a bond is considered an asset. And just like a stock or a bond, you can sell your pending real estate commission to a real estate commission advance company and get some of your money now, rather than waiting for closing which could be months away.

The way this works is: You sell the commission you are owed to the real estate commission advance company at a discount. You get your money right away. They wait to get paid at closing. It is as simple as that. You get some of your money now, and they get paid to wait. This arrangement allows you to get cash flowing into your cash account faster which can keep you going during tough times.

What Is the Difference Between a Realtor Commission Advance and a Bank Loan?

A real estate commission advance is not like a bank loan in any way. A real estate commission advance does not require a credit check and does not require monthly payments. The fee structure is much different than that of a typical bank loan. Also, a real estate commission advance doesn’t accumulate daily, monthly, or yearly interest like loans do.

In fact, a real estate commission advance is more like selling futures (puts and calls) than it is a loan. You are selling an asset (your pending commission) at a discounted rate, and the people you sell it to receive their money at some designated date in the future and make a profit.

Credit Checks Are Not Used in Commission Advances for Real Estate Agents

In the underwriting process real estate commission advance companies don’t check your credit. They do however check for liens and judgments before they enter into an agreement.

They do this to make sure they can collect their money at closing and there are no other lien holders who have a priority claim against the commissions they intend to collect at closing; however, your credit score will not stand in the way of you getting approved.

Why do Real Estate Agents Use Commission Advances?

Commission advances are funds provided by a commission advance company to the agent or broker before the final closing meeting. Real Estate Agents often use commission advances as a finance option to free up working capital. These funds can be used to cover marketing costs, legal fees, and other expenses associated with closing real estate deals.

One of the biggest advantages of using a commission advance is the ability to access funds quickly. Instead of waiting weeks or even months to receive your commissions, you can get some of your money in as little as 48 hours. This can give you the reprieve you need to keep going when times get lean (like during a recession).

Frequently Asked Questions about Real Estate Commission Advance

Question: Is there a minimum size commission that you advance Real Estate Agents?
Answer: There is no minimum size commission, but the minimum fee is $300.

Question: Is there a maximum size commission that you advance?
Answer: Yes. The maximum amount is $30,000.

Question: Are there any reserve holdbacks?
Answer: Yes, there is a 10% reserve holdback on every advance.

Question: Are there any administration fees?
Answer: There is a $30 wire fee for any outgoing wires. Agents can opt to receive funds via eCheck for no charge.

Question: Are there any application fees?
Answer: No

Question: Do you advance brokers of record?
Answer: Yes, on a case-by-case basis.

Question: Can I advance more than one deal at a time?
Answer: Yes

Question: How much of my Commission can I Advance?
Answer: Up to 80% of the net commission is due to the agent.

Question: How quickly can I get my advance processed?
Answer: Advances are processed in 48 hours or less — the majority of advances fund the same day.

Question: Are your advances restricted to a closing within 90 days?
Answer: N0, within 120 days.

Question: Do you require a minimum size deposit?
Answer: No