It’s been an interesting couple of years in the land market, with low-interest rates and high demand driving serious competition among buyers and making it increasingly difficult to score a good deal. But with record-breaking inflation and rising interest rates, it makes sense to wonder how prices might be affected—and whether these interest rate increases are a good or bad thing for buyers.
Only time will tell what happens with prices moving forward. However, there’s reason to believe that rising interest rates may actually be a win for frustrated and eager buyers. Here’s why.
What’s happening with interest rates?
Back in February, the Federal Reserve announced that it would be raising interest rates several times this year. The initial increase of 25 basis points took place in March and marked the first federal increase in interest rates since 2018.
These increases are a direct response to inflation and are intended to help reset the economy by slowing economic growth and reducing consumer spending. Interest rates are anticipated to rise steadily on everything from credit cards to auto loans. And of course, these rates will also affect mortgage and personal loans—both of which might be used to finance a land purchase.
Interest rates and land prices
We’ve been enjoying incredibly low-interest rates for a while now, but if you’ve been trying to buy land, then you know there’s a downside to increased spending power.
Low-interest rates, coupled with growing interest in land investments, have meant steep competition and sky-high prices for available properties. According to the most recent REALTORS Land Market Survey, land prices grew 6% in 2021, second only to price growth in single-family rental units. That’s a sharp incline and not-so-great news for land buyers who don’t have the extra cash to invest.
Here’s where higher interest rates can help. By increasing borrowing costs for land purchases, rising interest rates level out the playing field a bit and (hopefully) bring prices back down. Buyers have less money to spend, and sellers can’t overvalue their property knowing that they’ll for sure find someone willing to pay the inflated price. Higher interest rates should also reduce instances of buyer-driven price escalations and over-bidding.
Higher interest rates don’t mean you can’t afford to buy land, but they do mean you’ll want to know how much you can actually spend and stick close to that number. As you start your land search, figure out exactly how you plan to finance your purchase—and in particular, where you can borrow from and how much. Keep in mind that interest rates will likely continue to increase through at least the end of 2022, so leave yourself some wiggle room and don’t expect current rates to hold out for too long.
Fortunately, if you’ve already been in the market and have had a tough time due to such high buyer demand, rising rates should bring things back under control. Wait it out a bit longer if you want to see exactly how prices respond, and continue to keep an eye out for that perfect property at a great list price.
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