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The Relationship Between Interest Rates and the Texas Housing Market: A Comprehensive Guide


One of the main factors influencing the Texas real estate market is interest rates. The change in interest rates whether it is to the advantage or vice versa has a direct influence on the availability of properties, people’s willingness to own, and the cost of land. It is important for all these across the board, whether it is the home seeker, the real estate investor, or the real estate professional. In this blog, we will show you the impact of the interest rate changes on the Texas housing market and discuss the things you should look for when these changes take place.

Landlord and Tenant discussing lease

Understanding Interest Rates

What Are Interest Rates?

Interest rates are directly correlated with the cost of money that a person or an organization owes to a bank or someone else in the form of a loan. To simplify things when one buys a home or takes out a different loan, the interest rates will determine what the total cost will be aside from the principal amount.


Interest rates from mortgages are benchmarked against the Federal Fund Rate. Accordingly, when the Federal reserve changes the rate to curve the inflation and boost the economy, the mortgage interest rate will likewise change.


Interest Rates are Fixed and Variable

There are two main types of interest rates for loans: fixed and variable. A fixed rate of interest does not vary, so that the debtor pays the same dollar amount monthly until the loan expires or is paid off. In contrast, the variable interest rates can be floated up or down in response to changes in broader interest rate environments, which would be difficult for borrowers to perform budgeting.


fixed rate versus variable rate

The Direct Impact of Interest Rates on Homebuyers


Affordability

When there is a hike in the interest rate, one’s monthly cost goes up. In other words, homeowners have to pay more money every month for their loans. Let's say you are trying to acquire a 300,000 house with a 30-year fixed rate mortgage at a 3% interest rate, your monthly payment will be approximately 1,265 without taxes and insurance included. But if the above-mentioned interest rate added 1% and reached 4%, the monthly payment will be approximately 1,432. This increase in monthly installments over a 30-year period will absolutely mean tens of thousands of dollars of extra payments.


Mortgage Qualification

Mortgage Qualification Analysis

Apart from making it tough for one to get a mortgage, the increase in interest rates can have a significant impact on one’s financial eligibility. Lenders use one’s debt-to-income ratio (DTI) when calculating the amount one can borrow. Higher interest rates may cause one’s DTI to be increased, which, in turn, may lead to a situation where one is no longer eligible to receive desired loan amount.


Buyer Sentiment

Expectations about rising interest rates can influence buyer behavior. When rates are expected to rise, potential buyers might rush to lock in a lower rate, leading to increased competition and higher prices in the short term. Conversely, if rates are going down, some buyers may choose to delay their purchase, hoping for a better rate in the future.


Interest Rates and Housing Demand in Texas


Texas Housing Market Overview

Texas has long been a hotbed for real estate activity, with cities like Houston, Austin, Dallas, and San Antonio seeing significant growth. The state's strong economy, population growth, and relatively affordable housing have made it a prime destination for homebuyers and investors alike.


Supply and Demand Dynamics

4 big factors that affect the housing market

The expectation of higher interest rates can make some buyers act in advance. If the interest rates are forecasted to climb, the prospective buyer can be tempted to hurry and lock in a rate which is lower than it will be in the future. The increased demand will result in a supply shortage which will increase the home prices in the short term. Conversely, in a scenario where rates are coming down, some home buyers might postpone their purchase, with the hope of being able to obtain a better rate.


However, the impact of interest rate changes can vary across different regions in Texas. For example, in fast-growing cities like Austin, the demand for housing might remain strong even with rising interest rates, while more rural areas might see a more pronounced slowdown.


The Influence of Interest Rates on Home Prices

Price Trends

The changes in monthly loan amounts are correlated to housing prices. Buyers rush to purchase houses when the interest rates are lower as they get the opportunity to buy at a lower interest rate, creating competition among those who want to buy the house. On the other hand, when interest rates go up, the demand for purchasing a house goes down, as potential buyers are not willing or able to raise the extra capital to meet the borrowing need.


Historical Data

When we look at historical data, we can see how past changes in interest rates drove the housing prices in Texas. For instance, Texas's home prices dramatically increased when the interest rates were low in the early 2000s and after the 2008 financial crisis. Nonetheless, when interest rates have gone up, such as in the late 70s and early 80s, the housing market has cooled off, mainly because buyers were not willing to purchase the houses. Thus causing price growth to either slow or in some areas prices even came down.


Impact on Real Estate Investors

Investment Decisions

Interest rates are a key factor in the property industry and they concern property investors to a great extent. Higher interest rates will cause properties to have to spend more on a monthly basis causing a reduction in potential return for its investors.


This will have a greater impact on investors who are working on fix and flips versus those who are looking to hold their properties. The higher interest rates will deter potential buyers from trying to purchase a property causing the investors to have to sit on the property and potentially having to go down on the sale price.


investment decision

Financing Options

Regardless of the high level of interest rates, potential purchasers may seek to find alternative options of obtaining the property. Cash purchases can also be an alternative option as it means to not borrow money. Additionally, one can acquire the property via seller financing or the assumption of the current loan that could be at a lower interest rate.


Advice for Buyers and Investors

Given the current and expected interest rate environment, here are a few strategies to consider:

  • Lock in Rates: If you're planning to buy soon, consider locking in your mortgage rate to protect against future increases.

  • Time the Market: While timing the market perfectly is nearly impossible, staying informed about interest rate trends can help you make better decisions about when to buy or sell.

  • Explore Financing Options: Consider all your financing options, including fixed-rate mortgages, ARMs, and alternative financing methods, to find the best suit your needs..


Conclusion

Interest rates play a pivotal role in the Texas housing market, influencing everything from home affordability to buyer demand and home prices. Whether you're a homebuyer, investor, or real estate professional, understanding how interest rate changes can impact your decisions is crucial. As rates continue to fluctuate, staying informed and being prepared to adapt to changing conditions will be key to navigating the Texas real estate market successfully.


Feel free to share your thoughts or experiences with interest rates and the housing market in Texas in the comments below!


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