Tips from Intercontinental Capital Group: What High Interest Rates Mean for the Housing Market
Buyers and sellers want to know the state of the housing market before making a decision that will heavily impact their lives - especially concerning finances. With all of the reports and numbers available, it can be overwhelming to try to discern which information could impact your choice.
If there's one thing to fixate on to help determine the condition of the housing market, it's interest rates. Understanding what these rates mean to the market and their impact can help you make an informed decision for your future.
Federal funds influence interest rates
When interest rates fluctuate, the cause is from higher up than you think. To begin to grasp how this is true, Opendoor states it's important to understand that federal law requires banks to keep a minimum amount of cash on hand, called a reserve requirement. If banks cannot meet this demand, they will need to borrow from other banks.
Now, this has nothing to do with housing - yet. If a bank needs a quick loan, an interest is added called the federal funds rate. The Federal Reserve sets this rate, which can set off a chain of events in the real estate market and the national economy.
Banks use the federal funds rate as a benchmark for setting the interest rates they charge their customers. If the federal funds rate is lowered by the Fed, banks can access money more cheaply and in turn lower their interest rates to clients. When borrowing is cheaper or more expensive, it can drastically change home-buying habits and business growth.
The fact that interest rates can be so easily manipulated by the Fed has not gone unnoticed. The government has tried to lower interest rates to encourage consumer spending and economic growth, though sometimes that alone isn't enough to accomplish their goal.
High interest rates deter buyers
The housing market is particularly impacted by high interest rates, though it can be difficult to predict exactly how it will react. One thing is for certain, when rates go up, borrowing becomes more expensive and consumers are less inclined to do so.
Similarly, there's less incentive to refinance and homeowners may be holding out on purchasing a new property until rates lower. In general, consumers are less likely to make large purchases because they have less disposable income, according to Investopedia.
Houses can sit on the market for a long time when high interest rates are present. Buyers will be hesitant to make a purchase as their money is essentially worth less than it would be if interest rates were lower. As a result, this does nothing to motivate sellers, who understand they may need to lower the price of their home in order to compensate and attract buyers during this time, but clearly prefer not to. While high interest rates are not always a complete no-go for purchasing or selling a home, consumers typically try to wait out the high-interest-rate market if possible.
The current situation
Since the start of the year, interest rates have actually been decreasing. This has been a steady trend, as the IRS reported that interest rates would once again decrease in Q3, starting July 1, 2019, as follows:
- 5% for overpayments
- 5% for underpayments
- 7% for large corporate underpayments
In turn, mortgage rates have begun to lower and have created an increased homebuyer demand. As Freddie Mac further explains, there are other factors that have also contributed to this demand. Even though the economy is slowing overall, a 50-year low in unemployment and stunted interest rates set by the Fed have created this environment. Consumers are borrowing, and most of them are entry-level buyers and first-time homebuyers.
With low interest rates one would think the housing market would be booming - but that's not the case. Having had time to properly evaluate the effects of this change over the summer, CNN reported that existing home sales decreased 1.7% from May to June of this year, and 2.2% from a year prior.
It's suggested this is because the price of homes has increased to a point where even lower mortgage rates cannot make them affordable for many Americans. Even if potential homeowners are making more, the cost of living and housing has grown at a faster rate than their paycheck. More affordable housing needs to become available for the benefits of low interest rates to drastically impact the housing market.
Moving into Q4, many experts are predicting the trend of decreasing interest rates to continue. While it's impossible to know what they will be, My Mortgage Insider compiled predictions from three leading economists that were all within a range of 3.7-3.9%.
The response to Q3's interest rate decrease was also promising. In the week ending August 2, mortgage applications were up 5.3% from the week prior, no doubt a response orchestrated by the Fed due to the poor sales numbers from the months prior.
Interest rates have a massive impact on how buyers and sellers interact with the housing market, but are are not the only factors to be considered. As you can see, low rates do not guarantee a flourishing market. Individuals may still be unable to afford a new home, or remain in their current residence due to comfort or necessity.
Similarly, high interest rates do not create a stagnant market. They may slow the market by deterring some buyers and borrowers, but there will always be a need for housing. Understanding what your money is worth and how to price your home for sale during periods of high interest rates is crucial.
If you want to learn more about current interest rates and how it could affect your loan application process, don't hesitate to contact one of the helpful lenders at InterContinental Capital Group today. With licensed mortgage experts in nearly every state, we can assist you in complying with state and local regulations and policies while streamlining your loan request.