How Is the Current Market Being Impacted By Interest RatesOne of the biggest key words in the real estate market is “interest rates''. While there is a lot of talk about interest rates and their impact on the real estate market, there can be just as much confusion and misinformation. Let's take a look at interest rates and how they impact the housing market.

What Is An Interest Rate?

Interest rates are the rates at which money can be borrowed for a set period of time. The higher the rate, the more money a borrower must pay in the form of interest on the loan. The U.S. Federal Reserve sets a rate at which it lends money to banks and other financial institutions, which in turn affects the rate at which they lend to businesses and individuals, such as people seeking a mortgage or loans for those planning to buy homes for sale in Clermont FL.

Effect Of The Economy On Interest Rates

A strong economy creates a strong demand for commodities and assets, including property. When GDP and employment rise, this is the sign of a growing economy. There are more people with more purchasing power, which means there’s a greater demand for real estate. Where there is greater demand, there are higher mortgage rates.

Because lenders only have a finite amount of money to lend, they have to charge higher mortgage interest rates so that they are able to lend more mortgages to more borrowers in the future. If the economy is taking a turn for the worse, and there is a greater supply than a demand, mortgage rates will go down with it. While rates have recently stayed low, we are still dealing with a housing shortage and low numbers of homes for sale.

How Rates Affect Housing Trends

When mortgage rates are lower, this makes the purchasing of a home more affordable. Consequently, the sales of homes rise as more consumers are able to take out a low-cost loan. Consumers with existing mortgages may attempt to re-finance their mortgage, meaning they trade their current loan for another, cheaper one. In periods of low interest rates, more houses are often built as demand rises, and development companies are able to borrow money at a cheaper rate to finance the construction.

Although the cost of mortgages is closely tied to the interest rate, the price at which homes are sold does not always appear in direct correlation. While low interest rates can raise demand for houses, pushing up the prices of homes, if the price gets too high, demand can cool, causing house prices to plummet. It is important to remember that correlation and causation are different and not always as closely tied as we may think.

Where Are Interest Rates Heading?

Many economic and housing market experts are predicting rising interest rates over the next two years. Of course, we have to bear in mind these are just predictions that are essentially an educated guess based on current conditions within the mortgage and housing market. In other words, they are far from certain and could fluctuate due to changing political and outside factors, but a rise of almost 30% in interest rates is still a significant prediction that should be noted.

What Would It Mean For The Housing Market?

If these mortgage rate predictions for 2022 turn out to be accurate, they could lead to a general cooling effect. The housing market tends to accelerate when mortgage rates are at their lowest, and slow down when borrowing costs start to rise. The reduced incentive to purchase due to higher rates would level out the one-sided seller’s market and bring some stability to the housing sector.

Interest rates and their impact on real estate can be very confusing and can leave you scratching your head. Making sure to understand they affect home buyers and sellers will ensure you make the best decisions for you and your family, regardless of your situation within the market. Keeping an eye on interest rates and sales numbers will give you a good understanding of the real estate market and the economy as a whole. 

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