One of the biggest risks to the housing market, many economists have been noting, is the virtual certainty that interest rates will rise, and probably sooner than most people think.
When interest rates rise, of course, homes cost more per month when they’re purchased with mortgages. Despite all the talk about the negative impact that a government default and higher interest rates would have had on consumers, there’s something really important to note here: Low interest rates are probably not helping the real estate market nearly as much as they normally would.
The reason is that a huge percentage of home buyers are paying cash. According to a June HousingPulse survey, 75% of investor transactions were financed with cash and in the Miami-Fort Lauderdale area last year, more than half of all transactions were financed with cash. According to the National Association of realtors, cash buyers accounted for 29% of all transactions in June. The NAR website has a great graph showing the declining percentage of real estate transactions that are requiring mortgages. While NAR’s analysis has often been misleading, their data for this kind of thing is reliable.
Of course, rising interest rates will affect the market for the large single-family homes that are typically not purchased by investors. And if you’re in the market to use a mortgage to buy a home after interest rates have risen, it will not be fun. But the huge number of cash buyers does serve to make the market less vulnerable to interest rates than real estate markets normally are. Especially for income properties, these numbers suggest that the real estate markets in many areas have hit a floor that will make them relatively immune to interest rate changes.