Interest Rates in Real Estate

This is definitely THE HOT TOPIC within real estate right now. Talk of interest rates is finding its way into conversations in almost all of my deals at the moment. Buyers want to know why they can no longer buy their dream home they were cleared for just a few months ago, and sellers are shocked to find offers below their asking price. Whats happening!? To understand this you have to understand the Federal Reserve and the economy.

Firstly, economies are volatile––they grow and contract unpredictably––and in order to control that volatility, the US has created the Federal Reserve. Economies grow when businesses and individuals are easily able to spend, and contract when they spend less. Key to this spending are loans. Taking out a loan enables a business or individual to spend money which grows the economy. However, there is a cost to a loan in the form of an interest rate. The higher the interest rate the more expensive that borrowed money is.

Why Does the Fed Change Interest Rates?

Economies expand and contract naturally. We would all like the economy to expand, however too much expansion––overheating––can cause a recession. So the Fed wants to prevent too much economic growth while at the same time avoiding recessions. It does this by influencing interest rates. The higher the interest rate, the more expensive borrowing is and thus the harder it is to buy a home or expand a business. But if the economy isn’t moving fast enough, the Fed will lower interest rates to make borrowing cheap again to stimulate growth.

How Does the Fed Influence Interest Rates?

By changing the supply and demand of money! The Fed influences interest rates by changing the amount of interest it pays to banks holding reserves at the Fed. If banks can make more money by holding reserves at the Fed then they won’t want to lend to anyone else for a lower interest rate. So if everybody else wants to borrow, they have to compete by accepting a higher interest rate.

What Does This Mean For Buyers?

Simply put, rising interest rates means buying a home becomes more expensive. But because buying is harder this means that selling is harder, so to compete sellers may have to lower prices. Aha! Therefore buyers have the opportunity to secure homes with a cheaper listing price, with the possibility of refinancing when interest rates lower in the future.

What Does This Mean For Sellers?

As mentioned before this means that sellers will have fewer prospective buyers for their property. If the seller is determined to sell, they must lower the listing price. However, if the seller has prime real estate––their property is in a good location and has good quality––then these listings usually won’t be as effected as they tend always to be in high demand.

-Isabella Luthje at Sotheby’s International Realty