The real estate market is finally getting less competitive. Here's why that's bad news for both renters and potential buyers — at least for now.

• Mortgage rates just reached 6% — more than double the rate borrowers were offered during June 2021.
• As rates rise, an expert says fewer investors are purchasing homes.

The average U.S. fixed interest rate for a 30-year mortgage rose above 6% this week. It's more than double the 2.98% borrowers were offered during the same time period in 2021. Spurred on by the Federal Reserve's interest rate hike, mortgage rates are likely to continue rising throughout 2022.

It's a good news, bad news situation for the real estate market.

The uptick is already impacting real estate investment. According to Redfin, soaring borrowing costs and home prices prompted real estate investors to slow their roll in the first quarter of 2022.

"Investor home purchases are falling for the same reason overall home purchases are falling: Surging interest rates and high housing prices have made it more expensive to get a mortgage and buy a home," Sheharyar Bokhari, Redfin Senior Economist, said in a statement.

Investors purchased a record $64 billion worth of homes in 2021 — the most in at least two decades. During the last three months of that year, that amounted to nearly 20% of the total homes purchased in the US.

Their presence in housing has helped to push home prices and rents to new highs, ultimately plummeting housing affordability for many potential homebuyers. As investors take a step back, it could help soften the real estate market.

"While roughly three-quarters of investor purchases are made with cash, investors are still impacted by interest rates because they often take out loans to get that cash," Bokhari said.

Higher mortgage rates could be good news for the housing market as they're likely to quell investor demand. However, the higher rates rise, the further housing affordability declines for prospective buyers. While slowing investor and buyer demand could lead to a cool down in the housing market down the road — it will take time, and right now renters and buyers need affordable housing options.

"The rise in prices has helped homeowners build equity, but often not enough to afford the house they want next, and higher mortgage rates are now making that next home even more unaffordable," Taylor Marr, Redfin deputy chief economist, said in a statement.

Higher mortgage rates are driving rental demand

As mortgage rates rise, they're contributing to worsening housing affordability.

According to Realtor.com, buyers of a median-priced home are now looking at monthly mortgage payments that are more than $400 higher than just a year ago.

"With mortgage rates surging over 200 basis points in the past four months alone, many home shoppers are hitting a hard ceiling on their budgets and demand for new homes is waning as a result," George Ratiu, chief economist at Realtor.com, previously said in a statement.

As more and more prospective buyers become priced out of homebuying, they're either returning to renting or staying renters longer — and it's driving rents to historical highs.

"While renting has become more expensive, it is now more attractive than buying for many Americans this year as mortgage payments have surpassed rents on many homes," Marr said.

Data from Realtor.com shows that across the country, rent prices are up in nearly every state compared to this time last year. According to the company, the median monthly asking rent in the U.S. reached a record high of $2,002 in May, rising 15% from the same time period in 2021.

For Americans earning the nation's median income of $67,521 a year, the average rent for a one-bedroom unit works out to nearly 36% of their pre-tax pay — exceeding what financial experts recommend budgeting for housing.

With inflation driving up costs for everyday items and rents rising rapidly — renters are maxed out. And as pandemic-related federal rent relief funds and programs run out, evictions are growing across the country. Experts say that in some cities, eviction filing rates are reaching 150-200% of pre-pandemic averages.

"Although we expect rent-price growth to continue to slow in the coming months, it will likely remain high, causing ongoing affordability issues for renters," Marr said.