What effect do higher interest rates typically have on real estate values?

Higher interest rates typically decrease buyer purchasing power, which can lead to lower property values. When interest rates rise, the cost of borrowing increases, making mortgages more expensive for potential buyers. This leads to a situation where buyers can afford less, which suppresses demand for homes. With fewer interested buyers in the market, property sellers may need to lower prices to attract offers, resulting in a decrease in overall property values. This inverse relationship between interest rates and purchasing power is a fundamental concept in real estate economics and is critical for appraisers to understand when evaluating property values in a changing financial environment.