Don't Be a Victim of Interest Rates: How Do Rising Rates Affect Real Estate Prices?

As interest rates continue to rise, what does that mean for vendors and buyers of property?

Here's how to calculate the impact of rates on real estate prices.

Adding It Up: How Do Rising Rates Affect Real Estate Prices?

Interest rates have been steadily rising these last few years. The Federal Reserve set the rate between 2 and 2.25% during the November 2018 meeting. This is going to continue to rise if the upward trend continues.

The interest rates are intimately tied to the real estate market. It's just not always immediately obvious in what ways. Real estate prices are slotted to rise 4% in 2018. That's actually down from 6% in 2016 and 2017.

Let's dig in and see how interest rates impact real estate prices.

How Interest Rates Impact Real Estate Prices

Real estate and interest rates are esoteric and difficult to understand, even for those of us with advanced economic training. Let's start off with the basics to gain a better understanding and see how they interact with one another.

What Makes Insurance Rates Rise?

Experts point to four main reasons for rising interest rates. They are:

• Inflation
• Bond supply
• Bond demand
• The federal reserve

As inflation rises, consumers become nervous their money is going to be worth less. Interest rates rise alongside inflation to compensate for these perceived losses.

Increased bond supply can also lead to rising interest rates. Bond suppliers are forced to borrow at increased interest rates due to supply and demand. On the other hand, decreased demand for bonds can also lead to higher interest rates, as the issuers will offer investors a higher return to generate more capital.

The Fed tries to stabilize these market fluctuations by buying bonds. This can also result in increased inflation at times.

The Impact Of Interest Rates on Real Estate

Interest rates are historically perceived as an independent variable. They're also in a state of flux even when everything else is seen to be stable. Nothing exists in a vacuum, however, not in physics and not in finances.

The value of an investment is its ability to produce cash flow down the line. Cash flow becomes devalued as interest rates rise. This makes an asset like a real estate property worth less with high interest rates.

Another way that interest rates can impact the real estate market is that investors may demand a higher return on investment (ROI) when interest rates are high. This can make certain real estate properties seem less desirable when the market is tough.

As you can see, the relationship between interest rates, inflation, and real estate is highly complex. Generally speaking, physical assets can weather tumultuous markets as their worth rises with the inflation.

That's part of what makes real estate such an attractive investment, especially during times when interest rates are high.

How To Buy A Home When Interest Rates Are Rising

Mortgage interest rates have been at their highest since 2014 this year. This is causing a lot of uncertainty in the housing market.

Home prices are still relatively low, however, so it's still a good time to buy a house. You just need to know how to find a good deal even when interest rates are on the rise.

What To Expect When Interest Rates Rise

The first thing you need to know about how interest rates influence real estate is that housing prices almost always spike drastically when a new interest rate is announced. This is due to potential investors or would-be homeowners who have been on the fence suddenly panicking, afraid that their assets are going to become devalued.

When there is an increase in demand, prices will match the market. The first thing to keep in mind when a new interest rate is announced is to wait a minute. Don't panic, but keep your cool, watch the market, and have a firm grasp on your budget and make sure to follow it.

You should never make big financial decisions out of fear. Keep a clear head, watch the market, and wait for the right deal. Then you can spring into action with a clear conscience, knowing you've done your due diligence and you're getting a good rate.

How To Know When To Invest In Real Estate

Knowing your financial capabilities will help you know when to make your investment, as well. Higher interest rates can greatly reduce the quality of real estate you're able to afford.

Imagine you're looking at buying a property worth $350,000 at an interest rate of 4.5%.  By the time it's all said and done, you'll have paid $230,738.79 in interest by the time your property is paid off.

Increase that interest rate by a meager .25%, which you can check for yourself using our mortgage calculator, and that number increases to $245,820.52. Add an additional .25%, for a combined 5% interest rate, and you'll pay a grand total of $261,116.20. That's almost the cost of the real estate itself!

As you can see, even minor fluctuations in inflation and interest rates can have enormous repercussions for your real estate budget.

Remember to do your homework, learn the ropes of where you're hoping to buy property, and keep a close eye for actual deals. It's always a great idea to have a trusted team in your corner, as well, if you're serious about saving money on real estate.

Are You Looking For Real Estate In Central Florida?

Now that you have a better idea of how interest rates work and how they influence real estate prices, you'll have a better understanding of when's the right time to invest.

If the time is now, whether you're looking to upgrade your home or just get into real estate for investment purposes, we are here for you! Whether you're looking to buy a home or sell a home, contact us today and let us help you!