Interest rates are the one factor most homebuyers concern themselves with when shopping for a mortgage. Everyone wants to know what it will cost them to borrow the money to buy a house. If the interest rates are too high, many people will shy away from the mortgage, which could have a negative effect on the housing market.
On the other hand, when interest rates are low, more people want to borrow money. They jump at the chance to get a mortgage at a low interest rate, especially when they can lock the rate in for 30 years. This may drive the housing market up higher.
Before you think you have it all understood though, there may be some complications you’ll want to consider.
Low Interest Rates Can Drive Up the Price of Homes
When interest rates are low, buyers are willing to look at homes. The demand for available homes then increases. As more and more buyers enter the market, the supply can decrease as buyers snatch homes off the market. Suddenly, the buyers find themselves in bidding wars, trying to win the bid on the home they want.
This action can cause home prices to skyrocket. The more money homes begin to sell for, the higher prices sellers will start asking. Sellers base their price on the market price in the area. This is the same strategy appraisers use to come up with a home’s value. If there’s been a lot of activity lately, prices can increase, which can put a damper on the excitement of buying a home. This could cause the housing market to start falling again.
High Interest Rates Can Drive Home Prices Down
On the other hand, if interest rates are high, the price of homes can plummet. The less demand there is for a home, the lower the price sellers will ask. Sellers will either become desperate to sell their home and keep lowering the price or they will take it off the market.
The Factors Affecting the Interest Rates
So now that you know that interest rates can affect the housing market, you probably want to know what affects the interest rates?
There aren’t any cut and dry answers regarding what drives interest rates. It really depends on the state of the market at the time. In general, though, the following affect interest rates:
- Events in the world – When the world seems shaky or there is unrest going on, consumers get nervous. This makes them not spend money. When this happens, interest rates start to fall in order to encourage the flow of money again.
- State of the economy – When the economy is doing well, it means that people are spending money. This usually causes interest rates to increase because people don’t need any encouragement to buy homes right now. When the economy is doing poorly, it means that people aren’t spending money. In that case, the interest rates usually fall in an effort to convince people to buy homes.
- Federal Reserve – The Fed doesn’t always step in and fix interest rates, but they do when it’s necessary. If the Fed sees that inflation is getting out of control, they may increase interest rates to stop the spending. If they see that money isn’t readily flowing in the economy, they may decrease interest rates in an effort to get money flowing again.
As you can see, the interest rate is an important factor in any mortgage. It can make a buyer decide to buy or home or walk away from it. Knowing how rates affect the housing market can help you get a better judgment of what’s going on in the housing industry as of late.