Effects of Increased interest rates: An overview of the North Dakota Difference

Updated: Oct 16

How did North Dakota perform in this looming crisis?

There is a hot topic in real estate today, rising interest rates. Following recent hikes, the increase in mortgage rates have a big impact on would-be homeowners and the real estate market in general. Let us dive into this matter and attempt to answer one of the biggest questions now, how does this affect the average U.S. citizen?


Purchasing power is heavily affected by interest rates. The rising cost of goods and services has forced people to make difficult financial decisions like cutting cut back on spending in other areas in order to afford the things they need. Rising costs can cause a sense of powerlessness because individuals don’t have control over rising prices.


On September 21, 2022 the Federal Open Market Committee (FOMC) announced another rate hike, raising the federal funds rate by 75 basis points (bps), to a range of 3% to 3.25%


The Federal Reserve’s main job is to regulate the banking system and interest rates, which impact the prices that financial institutions lend money. The Fed’s control over interest rates gives it enormous power over the economy as a whole. However, their current decision to ‘speed up’ the economy by raising interest rates is likely to cause even higher inflation and subsequently higher cost of goods and services.


When the Federal Reserve raises interest rates, it makes it more expensive for people to borrow money. This causes the businesses to shift into a saving mode instead of a growth mode. The economy then slows because businesses cease to expand services, increase pay, or create new jobs.


Mortgage rates are tightly associated with interest rates. Home sales nationwide are expected to cool off as the average APR rose on a 30-year fixed mortgage today, inching up to 6.66% as of Oct 6, 2022.


In a recent article, Mortgage 300 Corp. laid out sample computations showing how a 1-percent increase in mortgage rates affects your purchasing power.

As rates go up, the amount of home you can afford goes down. For every 1.00% increase in interest rates, your buying power decreases by about 10.00%.

For example, let’s say you can afford $1,252 on your monthly principal and interest payment. With a 30-year fixed rate loan, a 20% down payment, and an interest rate of 4.75% (assumed annual percentage rate [APR] of 4.87%*), you could borrow $240,000 to purchase a $300,000 home.

But if rates go up to 5.75% (APR 5.88%*), the amount of home you can afford decreases to $268,100; causing you to lose $31,900 of buying power. That’s a lot of buying power!


How will rising interest rates impact home sales in North Dakota? In September 2022, data shows that the average time a listing in North Dakota MLS is 178 days, almost half compared to last year at 320. The average sale price of a home is approximately $10,000 higher than last year. Prices and home sales have historically proven to be more stable in North Dakota compared to the rest of the country. A primary factor is due to the low amount of foreclosures in North Dakota; with only 1 in every 4,466 properties going into foreclosure. This puts North Dakota as the third lowest rate of foreclosures in the nation. Due to this, home prices are less likely to fall severely and suddenly since foreclosed properties are one of the main drivers for home prices to drop. When the market is not saturated by these distressed and low-priced foreclosures, home prices remain stable without drastic drops in pricing. North Dakota has once again proven its resiliency compared to the rest of the country. However, with national economic projections and forecasts on interest rates, it is undeniable that we may see a market cooldown in the state as we move further along the quarter.


Bottomline.


The drastic increase in interest rates has affected several markets nationwide and the real estate market is not an exception. Though we may see North Dakota going through a cool-down period while rates rise; historically, it has remained resilient despite nationwide economic downturns. This is why you should reach out to a real estate professional. They have weathered storms like this before and have the knowledge and experience to overcome them.


Consider Proven Realty as your choice. We are proud to represent and deliver Experience, Service and Results in all of our transactions. We have been in the field for years and we can say that these cycles come and go, but property price appreciation in the long term will always give you financial security.


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