What Do Rising Interest Rates Mean for DC’s Housing Market?

What Do Rising Interest Rates Mean for DC’s Housing Market?

  • Lockard + Smith
  • 05/31/22
In early May, the average 30-year fixed mortgage rate reached 5.27% — the highest rate since June 2009. Compare that figure to spring of 2021 when interest rates were closer to 3%, and you realize just how staggering the climb has been.
Higher interest rates have consequences for buyers and sellers — but especially for buyers. For example, A 30-year loan of $500,000 costs $576 more each month when the rate climbs from 3% to 5%. 
What does this specifically mean for buyers? And what does it mean for sellers? Here’s more on what climbing interest rates mean for real estate transactions in the Washington, DC area and around the country.

What Higher Interest Rates Means for Buyers

Rising interest rates won’t suddenly create a buyer’s market. But there are some benefits that will emerge for buyers to offset the rising cost of mortgage loans. Here are four things you can expect as a buyer moving forward in a higher-interest-rate environment.
1. Lower Competition
Demand has significantly outpaced supply in and around Washington, DC the last few years. Spiking demand means lots of competition for buyers. You likely saw headlines about long lines snaking out of open houses before they even began. That scene became normal in DC and surrounding areas — but the market may be shifting.
Expect demand to cool down over time if interest rates remain high, which should reduce competition to some degree. Higher interest rates typically mean fewer buyers. After all, it’s more expensive to borrow money when interest rates are high, which means fewer individuals and families want to take out more expensive 6-figure loans.
But demand won’t truly cool down until inventory catches up. Inventory has been extremely low in the DC area in recent years, which is why competition has been so high. With new businesses (like Amazon) moving to the area, the influx of homebuyers has put a serious strain on the market. More on inventory in a moment.
2. Slower Price Growth
In March 2022, the median home sale value in the DC area reached $525,000, representing a 9.4% increase year over year. That increase comes on the heels of consistent new price records in 2021.
Competition and pricing are inter-connected, of course. High demand drives prices even higher, which is what’s been happening in our market in recent years. The DC area experienced a nearly 10% year-over-year increase in the median home sale value between March 2021 and March 2022. That growth in home values is unsustainable, and rising interest rates should help stem the rise.
Prices will continue to increase over time, but they will do so at a more modest rate — national appreciation rates are between 3.5% and 3.8% on average. The more modest rate will help prospective buyers keep pace with the growth. There may be fewer buyers in the market due to the cost of taking out a new mortgage loan, but the buyers will presumably be looking for homes at more stabilized prices.
3. Increasing Inventory
As noted above, low inventory has exacerbated challenges for buyers in recent years. While interest rates may increase inventory, there remains a lot of catching up to do in the DC area. For example, there were 340 detached homes for sale in Washington, DC in November 2019. That number fell to just 167 in November 2021. Inventory won’t just reset overnight — it will take time.
If inventory does not catch up, or if interest rates fall again, prices in Washington, DC and around the country could continue to climb at an accelerated pace. That’s not good news for buyers — but it’s something that prospective sellers would welcome.
4. An All-Cash Advantage
All-cash buyers dominated transactions in major markets in 2021. And, If you’re an all-cash buyer, you always have the advantage. You had the advantage when competition was tight and prices were high. Your cash meant less risk for sellers before closing because there was no lender or underwriting department involved.
Your cash remains an advantage today, because you are not affected by rising interest rates. In fact, if price growth slows down, you’ll be able to get even more for your money in the DC area without navigating through serious competition.

What Higher Interest Rates Mean for Sellers

At first glance, higher interest rates may seem like bad news for sellers. But there are a few silver linings to cling to as the market dynamics change in 2022. Here’s a look at what you can expect when selling in a higher-interest-rate environment.
1. Fewer Prospective Buyers
First, the bad news: There are likely to be fewer prospective buyers to uptick competition. But, if you read the section on inventory above, you know that there’s still relatively few options for buyers on the market right now. It’s not as though buyers are suddenly seizing the advantage.
In many markets around the country, sellers have been able to demand no-inspection transactions and other perks that kept deals moving forward with limited risk. Those perks may go by the wayside over time if interest rates remain high.
2. Stabilizing Prices
Now for some good news: Prices will continue to climb in the DC area. Competition may diminish somewhat, and inventory may rise a little bit. But the overall price of homes historically grows at a steady rate. The change in interest rates won’t put your home at risk of depreciation — not the DC area.
Pricing your home will also be a little easier moving forward if interest rates remain low. There will be less volatility in the market. This will prevent you from leaving money on the table by selling too low, though it may also prevent you from getting astronomical bids well over the asking price.
3. A More Normal Experience
We mentioned the long lines snaking out of open houses above. That’s not normal. And it’s not a great experience for buyers or sellers. Expect things to get back to normal slowly if interest rates remain high.
Go back to the June 2009 date mentioned in the introduction of this post. That summer, the housing market was still experiencing the aftershocks of the failure of Lehman Brothers and the tremors of the Great Recession that was just beginning. Interest rates dropped to keep the economy moving forward during a time of turmoil.
A little more than 10 years later, the COVID-19 pandemic once again rocked the economy, sending the stock market spiraling and inspiring the Federal Reserve to keep interest rates low. When you look at the years from 2009 to 2021, you see a period of sustained low interest rates that is far outside the norm in United States history.
The rising interest rates that we’re seeing in 2022 are much more a return to normal than an aberration. Over the long-term, interest rates in a normal range should bring stability and equity to a housing market that has run hot or cold for more than a decade now.
This is all slightly better news for buyers than sellers. But everyone will welcome a return to normalcy. 

Successfully Navigate the DC Housing Market

The real estate landscape is changing rapidly. That’s true across the country, but it’s especially true in and around Washington, DC. 
At Lockard+Smith, we bring a wealth of experience and local knowledge to home transactions. As conditions change, we successfully help buyers secure the homes they want while helping sellers maximize their return on investment.
Contact us to learn more about reaching your real estate goals in Washington, DC and surrounding areas.


With over three decades of combined experience, our team specializes in single-family homes and luxury condos, consistently ranking among the top 1% of agents in the DC metropolitan area. Contact us today and let us guide you to real estate success in the nation's capital.

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