While the housing market is often one of the first victims of rising interest rates, the Federal Reserve’s monetary policy can have a dramatic effect on the land market as well.
As the Fed raised interest rates numerous times in 2022 and is expected to continue doing so in 2023, the cost of borrowing money will also remain elevated. During times like these, we often see a ripple effect of impacts across the real estate market for both buyers and sellers, and this is especially true when it comes to land transactions. However, just because the market is down doesn’t mean all hope is lost. There are plenty of ways to prepare. Below, we’ll break down how high-interest rates are impacting both land buyers and sellers.
How High-Interest Rates Are Impacting Land Buyers
In real estate, buyers are often the first group to face the challenges of rising interest rates, because most buyers finance their purchases. Here are some of the direct impacts:
Buyers Are Facing Affordability Challenges
When the Federal Reserve increases interest rates, lenders follow right behind them. Today, the cost of a loan is significantly more expensive than it was two years ago. When financing a land purchase, buyers seek a land loan, which is a bit different than a mortgage. Because it’s more difficult to determine the value of land and there is no property collateral, lenders sometimes view these loans as risker, which means they tend to have higher interest rates than mortgages.
Additionally, many lenders are concerned about the macroeconomic picture and the possibility of a recession, which has caused many to tighten credit approval policies. This could make it more difficult for buyers to be approved for a land loan in the first place.
With higher interest rates on land loans as well as more restrictive credit requirements, buyers are facing major affordability challenges. This has ultimately resulted in less demand for land as many buyers have been priced out of the market.
Buyers Are Exploring Unique Financing Options
The buyers who are still in the market for land are being forced to get creative with their loan options. Going for a shorter loan term or flexible interest rates are two common ways to lower your monthly payment. Placing a higher down payment on the land or seeking specialty financing options, such as a lender who offers conversion options on interest rates, are options as well.
Buyers Are Discovering New Land Benefits
To help with affordability challenges, buyers are on the look for new strategies to help them save money on their property. Renting space, crop sharing, timber appraisals, and conservation easements are a few of the more common ways buyers are saving money. There are also many tax credits buyers can explore when owning land.
How High-Interest Rates Are Impacting Land Sellers
High-interest rates are directly affecting sellers because there are ultimately fewer buyers on the market. Here are some of the impacts sellers face:
- Sellers Are Looking To Maximize Their Land Value
With less demand for land, property values are starting to drop. While real estate and land are generally appreciating assets, market conditions can cause prices to drop. As a result, sellers are busy looking to add as much value as possible to the property. Unused timber and available farmland are two factors that can help boost property values. - Land Is Taking Longer To Sell
For the last couple of years, it’s been quite the seller’s market for both homes and land. Demand has been high and inventory has been low, which put sellers in the driver’s seat. Now that affordability challenges are causing buyer demand to wane, sellers are receiving fewer offers, and as a result, land is typically sitting on the market much longer. - Eager Sellers Are Dropping Prices
Sellers who are eager to unload a property are more willing to drop the price to hopefully attract attention from the smaller pool of buyers. If your land is appropriately priced and you have the time, it might be worth being patient and riding out the storm.
While high-interest rates are likely to pose a challenge for the next several months, navigating the complexities of the current Florida land market is a lot easier with an experienced land broker in your corner. Contact us today at Palmetto Realty.