What The Interest Rate Rise Will Mean For Real Estate

shutterstock_170184254Every indicator is pointing to the fact that the FED will shortly be raising interest rates. FED chair Janet Yellen has been laying out her case for the raise for some time [1], and many financial commentators are of the opinion that the raise could well be a good thing [2]. Those who are thinking of buying or selling real estate, however, are not so sure. What could the interest rate rise mean for the real estate market? Should we be worried, or will this ultimately prove to be a good thing?
Borrowing Expense
One thing which cannot be denied is that borrowing will become more expensive after the interest rate rise. This means that the cost of borrowing for a mortgage could potentially rise beyond the means of some – particularly when other monthly costs such as home insurance [3] and property taxes are factored in. However, many feel that the impact upon mortgage rates is not likely to be drastic, and that any rise should happen in a manageable manner [4]. Of course, the flipside of the increased cost of borrowing is that those with savings will find their saved money increasing faster due to the heightened interest it’s gaining. This could put many people in a position which allows them to splash out on property faster than they thought. All in all, while some may find that mortgages slip just beyond their reach and others gain profitable returns on their savings, for the majority of us little will change in the mortgage market for quite some time.
A Rush To Buy
Some believe that the projected interest rate increase will encourage those who have been toying with the idea of buying or selling real estate to take the plunge and go for it. The FED interest rate hike will have a number of wide-ranging effects [5], which anyone who keeps even a vague eye upon economic proceedings will be aware of. The thought of changing times and a perhaps unpredictable market in the future could well prompt people to take action now, while interest rates are still low and the housing market is more of a known entity. If you want to sell a house in the future, doing so sooner rather than later could well result in a swift sale as buyers eager to get in before the rate hike snap up available real estate. This is certainly a common phenomenon worldwide just before interest rates rise [6].
Economic Improvement
In general, people in the real estate world tend to worry when interest rates rise. Not only does it raise concerns about another Great Recession-type situation, which saw the housing market as the epicenter of the economic collapse which shook the world, it also brings on more prosaic worries about general affordability and the attractiveness of mortgage deals to buyers. However, what’s often forgotten in these discussions is the fact that a rise in interest rates is often a pretty good indicator of a healthy economy. Certainly the housing market is a lot healthier right now than it has been for many years, and is unlikely to be rocked unduly by rising borrowing costs – particularly as many believe that mortgage rates could quickly settle around the 4% mark [7]. The real estate market in its current form is strong and sturdy enough to take an interest rate rise in its stride. Furthermore, rising interest rates often follow a period of good economic health. This certainly seems to be the case this time. As such, buyers in general are more able to afford mortgages and are thus likely to keep the housing market moving. As such, this rate rise is to be welcomed as an indicator of prosperity and continued dynamism within the real estate world.

Written by Guest Contributor: Gemma Higham

[1] Jeff Cox, “Fed Chair Janet Yellen: Interest rate hike to come ‘later this year’”, CNBC, Jul 2015
[2] Mark Hamrick, “7 unintended benefits of higher interest rates from the Federal Reserve”, Bankrate
[3] QZ, “Covering your property the right way”
[4] Lawrence Yun, “Fed Rate Hike Impact on Mortgage Rates”, Forbes, Aug 2015
[5] Financial Times, “When interest rates rise”
[6] BBC News, “Rate rise linked to mortgage activity”, Sept 2015
[7] Mark Fleming, “Raising Rates Can Be Good For The Housing Market”, Forbes, Apr 2015

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