Higher mortgage interest rates are changing the real estate market, especially for buyers and sellers throughout the Twin Cities and Minnesota.
With mortgage rates considerably higher than the ultra-low rates buyers became accustomed to a few years ago, affordability has become one of the biggest concerns in the housing market. Buyers are paying much more attention to their monthly payment, while sellers are discovering that they may need to become more flexible with pricing and concessions.
But higher rates don’t necessarily mean it’s a bad time to buy a home.
In fact, today’s market may offer opportunities that simply weren’t available when interest rates were lower and buyers were competing against multiple offers.
How Higher Mortgage Rates Affect Home Buyers
The biggest impact of higher interest rates is purchasing power.
When mortgage rates rise, the monthly payment on the same loan amount increases. That can push buyers into a lower price range or cause them to reconsider buying altogether.
We’ve noticed buyers becoming more hesitant as rates have remained elevated.
However, there’s another side to the equation: home prices and negotiating power.
Homes that might have received multiple offers a few years ago may now sit on the market longer. Some sellers are reducing their asking prices by $10,000, $15,000, $20,000 or more to attract buyers.
That can create opportunities.
Instead of looking only at the mortgage rate, buyers should consider the entire transaction, including:
- Purchase price
- Seller-paid closing costs
- Mortgage rate buy-downs
- Builder incentives
- Days on market
- Inspection opportunities
- Potential price negotiations
The mortgage rate is important, but it’s only one part of buying a home.
Can a Seller Help Buy Down Your Mortgage Rate?
One strategy buyers should discuss with their real estate agent and loan officer is asking the seller to contribute toward a mortgage rate buy-down.
Depending on the loan program and transaction, seller concessions may be used to help reduce the buyer’s borrowing costs.
Another option is a temporary rate buy-down, such as a 3-2-1 buy-down.
A 3-2-1 buy-down temporarily reduces the effective interest rate during the first few years of the mortgage. This can make the initial monthly payments more manageable while giving the buyer time to adjust financially.
Builders may also offer financing incentives on new construction homes.
However, buyers need to look carefully at the numbers.
For example, increasing the purchase price in exchange for seller concessions isn’t automatically a good deal. The home still needs to support the agreed-upon value, and financing and appraisal requirements have to be considered.
That’s why buyers should have their real estate agent and loan officer compare the different scenarios.
We’ve Seen 7% Mortgage Rates Before
Today’s mortgage rates can seem shocking because buyers became accustomed to extremely low rates during the pandemic-era housing market.
But rates around 7% aren’t unprecedented.
I’ve been working in real estate for more than 20 years, which means I’ve worked through very different housing markets, including the years surrounding the 2008 housing crisis.
One major difference was that buyers during that period often had opportunities to purchase foreclosures and short sales at substantially discounted prices.
When the purchase price becomes attractive enough, buyers often become less focused on the interest rate.
That same principle can apply today.
A higher interest rate isn’t necessarily a reason to avoid buying if you’re able to negotiate a significantly better purchase price.
Higher Rates Could Create Better Negotiating Opportunities
From roughly 2020 through 2023, buying a home could be extremely stressful.
Buyers were frequently competing against multiple offers. In some situations, buyers offered tens of thousands of dollars over asking price.
Some buyers even considered waiving inspections to make their offers more competitive—something I generally don’t recommend.
Today’s market can be very different.
When a property has been sitting on the market for 20, 30 or more days, buyers may have an opportunity to negotiate.
You might be able to negotiate the price, request seller-paid closing costs, ask for repairs or structure an offer with contingencies that would have been difficult to get accepted during the peak seller’s market.
That makes days on market an important number for buyers to watch.
You Can Refinance a Mortgage, But You Can’t Change Your Purchase Price
There’s a popular real estate saying:
“Marry the house, date the rate.”
While buyers shouldn’t assume that rates will fall or base a purchase on a future refinance, there is an important concept behind the saying.
If interest rates eventually decline and refinancing makes financial sense, a homeowner may have an opportunity to refinance.
What you can’t do later is renegotiate what you originally paid for the house.
That’s why getting the right house at the right price can sometimes be more important than waiting indefinitely for the perfect mortgage rate.
The important question is whether you can comfortably afford the home at today’s payment, without depending on a future refinance.
How High Mortgage Rates Affect Home Sellers
Higher rates aren’t only affecting buyers.
They’re affecting sellers as well.
One of the biggest challenges is that many homeowners currently have mortgages with rates far below today’s rates. A homeowner with a mortgage around 3% may hesitate to sell because buying another property could mean taking on a much higher interest rate.
This has helped keep some homeowners from listing their properties.
However, people eventually have reasons they need to move.
They may receive an out-of-state job offer, need more or less space, experience a major life change or simply reach the point where moving becomes more important than keeping their existing mortgage.
When that happens, sellers have to compete for the smaller pool of qualified buyers.
Sellers Need to Pay Attention to Days on Market
If a home has been listed for three or four weeks without receiving a serious offer, sellers should start evaluating why.
Usually, the issue comes down to one of two things:
Condition or price.
Sometimes even a relatively small price adjustment can expose the property to another group of buyers and generate additional showings.
Sellers also need to remember that buyers aren’t simply looking at the asking price.
They’re looking at the monthly payment.
A price that may have worked when mortgage rates were significantly lower may not produce the same buyer demand in a higher-rate environment.
Could We See More Short Sales and Foreclosures?
One of the biggest questions heading into the coming months is whether higher borrowing costs combined with other financial pressures will result in more distressed homeowners.
Job losses, increased living expenses and other financial problems can eventually put pressure on homeowners who were already struggling.
That could potentially result in additional properties entering the market through distressed sales, short sales or foreclosures.
However, that does not automatically mean Minnesota is heading toward another 2008-style housing crash.
Today’s housing market is different in several important ways, and real estate conditions vary dramatically from one part of the country to another.
Minnesota Is Different From Markets Like Florida and Austin
Real estate is local.
Some markets around the country experienced enormous amounts of new construction and investor activity during the housing boom.
Markets with substantial new inventory, vacation rentals and investment properties can react differently when demand slows.
Florida, for example, has many areas where vacation rentals and investment properties make up a larger portion of the housing market.
If owners of investment properties begin selling at the same time that builders continue adding inventory, prices can face additional pressure.
The Twin Cities housing market doesn’t have exactly the same dynamics.
That doesn’t mean Minnesota home prices can’t decline.
They certainly can.
But buyers and sellers shouldn’t assume that a headline about falling prices in Florida, Texas or another market automatically predicts what’s going to happen in Woodbury, Cottage Grove, Lake Elmo, Stillwater or the rest of the Twin Cities.
Is It a Good Time to Buy a Home in Minnesota?
There isn’t one answer that applies to everyone.
But today’s market can offer opportunities for buyers who are financially prepared.
Instead of competing against dozens of buyers, you may have time to inspect the property, evaluate your financing and negotiate with the seller.
Homes with longer days on market can be especially interesting.
The key is finding the right combination of:
Price + mortgage payment + property + seller motivation.
If those numbers make sense for your financial situation, buying in a higher-rate market can still be a good decision.
Is It a Good Time to Sell a Home?
Sellers can still successfully sell homes in this market, but pricing strategy is increasingly important.
The days of simply putting almost any home on the market and immediately receiving multiple offers are not something sellers should count on.
Buyers have more choices and are extremely payment-conscious.
That means sellers need to pay attention to their competition, property condition, days on market and buyer feedback.
In some situations, offering concessions toward closing costs or financing may also be more effective than simply reducing the asking price.
The Twin Cities Housing Market Is Becoming More Balanced
Higher mortgage rates are creating challenges, but they’re also changing the balance between buyers and sellers.
Buyers may have more negotiating power.
Sellers need to become more realistic about pricing.
And both sides need to pay closer attention to financing than they did when mortgage rates were historically low.
After more than 20 years working in real estate, I’ve seen buyer’s markets, seller’s markets, the Great Recession, foreclosures, short sales, historically low mortgage rates and intense multiple-offer situations.
Every market creates different opportunities.
The key is understanding the market you’re actually in rather than trying to buy or sell based on what the market looked like several years ago.
At Woodbury Real Estate Group, we follow what’s happening throughout the Twin Cities and help buyers and sellers understand how these changes affect their individual situation.
If you’re considering buying or selling a home in Woodbury, Cottage Grove, Lake Elmo, Stillwater or the surrounding Twin Cities area, we’d be happy to help you evaluate your options.
Frequently Asked Questions
Are high mortgage rates causing Minnesota home prices to fall?
Higher mortgage rates can reduce buyer purchasing power, which may put downward pressure on prices. However, home prices depend on local inventory, buyer demand, property condition and neighborhood-level market conditions.
Should I wait for mortgage rates to drop before buying?
Not necessarily. Waiting for lower rates could also mean facing higher home prices or increased competition if more buyers return to the market. The better question is whether you can comfortably afford the home and payment available to you today.
Can a seller pay to lower my mortgage rate?
Depending on the transaction and loan program, sellers may be able to provide concessions that can be used toward certain closing costs or mortgage rate buy-down strategies. Your lender can explain the specific limits and options available for your loan.
What is a 3-2-1 mortgage buy-down?
A 3-2-1 buy-down is a temporary financing structure that reduces the effective interest rate during the first three years of the loan, typically by three percentage points in year one, two points in year two and one point in year three before returning to the full note rate.
Should I look at homes that have been on the market for 30 days or longer?
Absolutely. Longer days on market can sometimes indicate an opportunity to negotiate, especially when a seller is motivated. It doesn’t necessarily mean something is wrong with the home.
Will Minnesota experience another 2008 housing crash?
No one can predict future housing prices with certainty. Minnesota also has different supply, demand and investor dynamics than some of the markets experiencing larger corrections. Local inventory, employment, affordability and mortgage conditions will all play a role in what happens next.
