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Interest Rate Impact

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Affordable housing depends on three key elements: income, mortgage rates, and housing prices. Higher wages expand buying power, while stagnant wages challenge affordability. When mortgage rates drop, generally, monthly payments decrease, making housing more affordable. However, a slight increase in rates can quickly reduce affordability, limiting market access for many. Recent mortgage rate shifts have been frequent and dramatic.

In early 2021, following the COVID-19 pandemic, rates reached 2.65%, a historic low, providing a temporary boost in buying power. Contrastingly, by April 2024, rates have soared to 7.1%, significantly constricting affordability and altering buyer behavior. This fluctuation is crucial for understanding the current market dynamics and anticipating future shifts.

In Michigan, the housing market has demonstrated significant growth and resilience. Over the past five years, average sale prices have increased by 45.8%. The surge in values is fueled by unprecedented post-pandemic demand, coupled with historically low statewide inventories, creating a strong yet challenging market. Inflation is also playing a critical role in housing economics, affecting both the cost of building materials and labor, and pushing home prices upward. As policymakers raise interest rates to combat inflation, mortgages have become costlier, dampening buyer enthusiasm. Despite these obstacles, and because property values tend to increase, real estate remains a preferred investment during this inflationary period. The escalation of mortgage rates has reshaped the structure of real estate transactions, particularly increasing the prevalence of cash sales.

As financing becomes more expensive, buyers who can afford to pay cash find it a more attractive option, benefiting from lower total purchase costs, quicker transaction times, and stronger bargaining leverage. This trend is evident in the rise of cash sales from 19.12% in January 2021 to 26.51% in March 2024, indicating a strategic shift in purchasing methods.

Navigating today’s market requires an understanding of the interplay between rates and pricing. For buyers, this means timing their purchases to capitalize on market conditions. For sellers, it involves setting competitive prices that reflect both current mortgage rates and buyer capabilities. Michigan’s real estate landscape continues to evolve, shaped by economic forces and market dynamics. Whether buying or selling, participants who understand these factors will be positioned to play their best hand.

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