Interest rates can be a tricky subject, and understanding what it means not only for you but for the economy as a whole can be quite confusing. There are several ways that interest rates can affect the housing market. If you’re a homeowner planning on buying or selling a home, having a basic understanding of what interest rates mean for the housing market could save a lot of heartache (and money) down the road.
Interest Rates and the Housing Market
First off, you need to know that interest rates are determined by the current economy and the Federal Reserve, which sets a guideline interest rate that lenders use to determine their actual, or ‘real’ interest rates offered to customers. Changes in interest rates affect the cost of taking out a loan.
It’s pretty simple economics. When interest rates are higher, it’s more expensive to take out a loan. When it’s more expensive to take out a loan, fewer people will do so. Whether that’s because they don’t want to pay more to borrow money based on the current interest rate or they simply can’t afford to take out a loan at the current rates isn’t really relevant since the outcome is the same. Less people take the plunge and get a loan when interest rates are higher.
Conversely, when interest rates are lower, it may move more people to choose to buy a home in order to take advantage of the current rates.
Mortgage payments, as generally large loans, can change a great deal based on current interest rates. The simple truth is that higher or lower interest rates may be the difference between someone being able to afford a mortgage and not.
Do Higher Interest Rates Make Selling Harder?
If you’re trying to sell your home at a time when interest rates are high, you may find that it’s a little more difficult than when rates are favorable. This is because there are fewer people looking to buy when high-interest rates mean that buying a home is less affordable.
Higher interest rates traditionally mean that the housing market is likely to slow down, which in turn generally leads to lower home prices. This is because, when there’s less competition amongst potential home buyers, offers are lower if they come at all; sometimes a slower market means that a home will sit on the market for an extended period of time before selling. When the trend is higher interest rates, you can expect to see overall home values fall at least a little, though different areas are affected differently.
Do High-Interest Rates Mean a Decline in the Housing Market?
Current trends are showing that interest rates are on the rise, which could spell bad news for a housing market that has been booming for the past several years. With personal debt also on the rise, a troubled housing market could spell disaster for homeowners in trouble who are looking to sell their homes to dig themselves out of a hole.
If you’re looking to buy or sell a home, it’s crucial that you have an understanding of interest rates and what causes them to fluctuate. Talk to a financial advisor to understand what you should be paying in interest rates and to better understand how they impact the housing market and economy.