Sometimes just thinking of interest rates is enough to give any aspiring homeowner a headache. You’ve seen the listings, you like some houses, and you’re ready to dive deep into the real estate market — if only technicalities weren’t standing in your way!
Unfortunately, understanding interest rates is not knowledge you can neglect to brush up on when you’re looking to buy. The interest rates will affect your financial ability and the amount you can afford, so it’s crucial to learn everything you can about it. Our home buyer’s guide to understanding interest rates will help you with the basic concepts:
Fed Funds Rate and Its Impact on the Market
The Federal Fund rate directly impacts banks and the liquidity of the economy, which in turn influences the market. It is the rate at which banks lend their reserve surplus to other banks — so the lower it is, the more banks can borrow and lend from each other. After the financial crisis of 2008, the Fed lowered the rate significantly so that they could keep the funds flowing. However, it’s now eight years later, and the economy has recovered. To prevent inflation from getting out of hand, the Fed is raising the rates.
Property Market Cycles
When rates go up, it has more to do with strength in employment and wages, and it’s not necessarily a bad thing. The market goes through 5-7 year cycles naturally, which is only partially affected by the interest rates. It has a way of correcting itself, which is why you rarely see periods of high real estate prices last a long time. Times of recession, like the one we had during and after 2008 when the Fed Funds rate was only 0.15%, is usually followed by a period of recovery. That leads to what is known as “the bubble,” when the recovery progresses into causing irrational prices. After a while, the bubble bursts and another adjustment or recession take its place.
How Do You Know When You Should Buy?
Looking at current market trends could help you determine where we currently are in the property market cycle. The Fed is also unlikely to raise the rates of more than 4% throughout the three years since the current market trends have shown that most rising interest environments hold a scale of 4%. It remains for about three years, at which point the interest rate must reduce due to high prices.
But what does this mean for the buyer? Even in a high-interest rate environment, you can still buy a home and not regret it if:
- You love the area and are buying a house to stay in for a long time;
- You’re confident that your employer will see steady growth and that your career will also progress;
- You have at least 30% of the value of the property saved up;
- You have a safety net to help out should the need arise.
Interest rates can make your decision more complicated when purchasing a home, but they don’t necessarily have to stop you. If you can afford the investment, consider hiring a professional with a proven track record who can help you make the best decision.
No matter what type of real estate market you’re in, it’s critical to work with a professional agent.
If you have a real estate related question, we’re here to help!