Interest Rates and the Real Estate Market

When acquiring a loan, borrowers need to pay the lenders an extra amount, called the interest rate, on top of the principal for using the assets. A lot of factors come into play while determining the interest rate, such as the current economical state. Set by a country’s central bank, interest rates are used by the banks across the country for determining their annual percentage rates (APRs). Higher interest rates lead to increased cost of debt, which tends to discourage borrowing and reduce consumer demand.

Interest Rates and Real Estate

It is crucial to have a sound understanding of the influencing factors of current and future fixed and adjustable interest rates to make financially sound and well-informed mortgage decisions. For instance, knowing the current interest rates can help you decide whether to choose an adjustable-rate mortgage (ARM) instead of a fixed-rate mortgage (FRM). Not only this, but it can also help you determine when it is a good idea to refinance out of an ARM.

Interest rates are very important to real estate. They influence the value of the real estate by determining the amount you need to pay in order to buy a property. If the interest rates are low, it will increase the demand for the property while helping to drive the prices up. High-interest rates are known to do the opposite.

Factors That Influence Interest Rates

Your own specific interest rate on a loan depends on several factors. First, the lenders need to consider the general borrowing cost in the economy. That number relies on the state of the economy and the existing monetary policy set in place by the government. Then, personal factors, such as your income, credit history, and the loan type and size, will determine the amount you will have to pay to get a loan.

The Fed’s Role

The Federal Reserve (Fed) has a key role to play in inflation expectations because the rates for longer terms are determined by the bond market’s perception of how well the Fed controls inflation by adjusting the interest rates. In essence, the Fed is responsible for setting the interest rates for short terms, which are then used by the market for determining long-term interest rates. The yield of the U.S. Treasury 10-year bond is a good example of this because the interest rates for 30-year mortgages are correlated with the U.S. Treasury 10-year bond yields.

In the first week of June 2022, we saw a rise from 5.40% to 5.65% in the average contract interest rate for 30-year FRMs. These mortgages had loan balances of $647,200 or less. In the following week, the average rate hit 6.28%.

Interest rates have a large impact on the real estate industry. The higher the interest rates, the less likely people are to take a loan to buy a house. Also, real estate is a dynamic industry where the interest rates change quickly, so it is important to be aware of the various factors that influence interest rates when you’re considering a mortgage.