How Interest Rates Are Affecting The Real Estate Market
Real estate constitutes a vital part of most people’s wealth. But, it is driven by a variety of factors. One of them is interest rates. Interest rates are one of the most important measures of how well the real estate market performs.
Whether you are a buyer or a seller, understanding how interest rates influence the real estate market is crucial. Interest rates are the engine that drives our economy, and understanding how they work is beneficial to everyone.
With that, this article will explain how interest rates are affecting the real estate market so you can make better economic judgments in the future.
What is an Interest Rate?
In a nutshell, interest rates are the cost of borrowing money from someone else. You will pay the interest at the rate set by the lender.
Generally, interest rates are often lesser when the loan term is shorter. So, the greater the interest rate, the more you will have to pay throughout the time it takes to repay the loan.
When it comes to financial institutions like banks, the same rule applies. Banks and other financial institutions, on the other hand, are not where interest rates are set. They get money from the Federal Reserve. Then, they offer loans at high prices. That is how they make money.
Moreover, different countries have their regulatory department that manages interest rates to boost or slow economic activity.
What are the Effects of Interest Rates in the Real Estate Market?
Because most people buy homes with borrowed money or a mortgage, changes in interest rates affect the real estate market.
Lower Interest Rates
Usually, people take out a loan when interest rates are low because they know they will pay less than most other times.
Contrariwise, when the interest rate is high, people will unlikely borrow money because they will have to pay more over the loan.
The same thing happens with mortgages. People are more inclined to purchase a property when borrowing for that purpose is cheaper. Thus, the real estate market expands as property purchases become more affordable.
However, as individuals desire to buy properties when borrowing rates are lower, property prices tend to rise. Demand drops which then cause the price of homes to plummet.
Higher Interest Rates
When interest rates rise, potential buyers are more likely to opt against taking out a mortgage and probably put off buying a house. As a result, there will be an oversupply of properties because of this drop in the number of buyers.
On the other hand, experts believe that rising interest rates also have their fair share of advantages to the real estate market. Housing prices will fall when there is an excess supply. Thus, serving an opportunity for buyers who have a sufficient cash reserve to buy a property.
Conclusion
To summarize, the real estate market expands as interest rates fall, while the real estate market falls as interest rates rise.
Low or high-interest rates are not necessarily a bad thing. In a stable and progressive economy, real estate will regulate itself until a supply-demand equilibrium is achieved.