The housing or the real estate market is a complex affair. The price of the houses is decided based on the factors that might be local, global, national, or regional. Other basic concepts such as the economic condition of a state or country, demand & supply of houses, mortgage rates, and inflation are also taken into consideration.
If you are a first-time buyer or seller wanting to sell your property, then you should be well aware of how mortgage interest rates affect the housing market as a whole. Well I, Joni Miller, a proud leader of selling luxury properties through Parks Realty in Middle Tennessee, will be telling you about the same in this comprehensive guide.
How Mortgage Interest Rates are determined?
According to investopedia.com, the mortgage interest rates are primarily of two types, fixed and adjustable. Each of these has multiple derivatives and hybrid combinations. The amount charged on top of the principal by the lender to the borrower in exchange for use of assets is known as the interest rate.
The most important factor that is responsible for determining the rate of interest is the economy of the state. The central bank of the country sets the rate of interest, which the banks and financial institutions use to determine the annual percentage rates. Another important aspect that decides the mortgage interest rates is the rate of inflation in the nation.
When inflation is high, the interest rates are also set high. The higher interest rates increase the cost of debt, which further discourages borrowing and slows down the consumer demand. A couple of other factors that are responsible for determining the interest rates are, the rate at which people of the nation save money and policies of the U.S Federal Reserve.
The Function, Significance, and Effect of Interest Rates
In general, mortgage interest rates are the rates at which money can be borrowed from the bank for a pre-determined duration of time. The higher the rate of interest, the more money the borrower will be paying in form of interest on the loan taken. The US Federal Reserve is responsible for setting the rate at which it will be lending to banks and other financial institutions. This in turn affects the rate at which banks further lend money to either the individuals or the residents, who seek a mortgage.
It is an extremely basic and general rule that if the rate of interest on a mortgage loan is low, more people are likely to take mortgages. As doing so will cost them less, as compared to the other times. On the other hand, if the rate of interest is high, borrowing money gets slowed down and expensive.
According to Home Guides, SFGate.com The effect of this will be so that when the mortgage interest rates are lower, the purchasing power of the people increases, and they will be getting various affordable housing options. As more and more customers tend to take low-cost loans, you will witness a splendid rise in the scale of the housing market. When the interest rates are low, customers with existing mortgages make attempts to refinance their loans, this means that they try to trade their current loan for a cheaper one. Also, when the rate of interest is low, more houses are being built, as the demand increases, and the construction company will also be able to finance their projects at a cheaper rate of interest.
The Financial Impact when the rate of interest increases
According to Wimer, a researcher, when the rate of interest increases by about half a percent, the house-buying power of people drop by 5%. For example, if there is a borrower Mr. X, who has a pre-approved loan of $350,000. If the rate of interest on the loan amount goes up by half a percent, the buying power of the borrower will go down by about $17,500. That means the amount of the pre-approved loan will drop to $332,500.
Impact on the Real Estate Market
Over the past few years, the real estate market has been red hot. According to the report of CEIC, during March 2022, the prices of houses in the nation have seen a drastic increase of about 17.5% in the past 12 months. But the current good news is, that the housing market has started to cool down a little bit. I will not say that the change is too much, it is just a small change, but that has driven a positive impact on the purchasing power of home buyers. Due to this, some of the home buyers will stay in the market despite of increased rate of interest. The increase in interest rates has also slowed down the selling process, which has led to the ultimate reduction or stabilization of home prices.
Some of the factors that contribute to the impact of inflating the mortgage interest rate
Several factors contribute to the impact of inflated interest rates such as:
• Competitiveness – The rise in interest rates does not apply to all vendors. Due to strong competition in the market, there might be some financial institutions that may decide not to pass an increased rate of interest to their customers.
• The financial status of the consumer – The banks and the other concerned financial institutions may worry that buyers are accustomed to the low rate of interest and that they might not be able to deal with the increased rate until they have kept aside a lumpsum amount of money. Those who are prudent in spending money lavishly or are saving money for purchasing a real estate property will have a buffer. Such people can easily buy a house despite any increase or upward shift in the rate of interest.
• Confidence in the Economy – Having a belief in a strong economy is really very important. If the economy is strong, then the income of the people will grow at a rapid pace, and they will also be able to purchase a house despite increased rates of interest or high borrowing costs. Conversely, if the confidence of a low economy persists in the heart of consumers then they will not be able to invest in property despite of low mortgage rate of interest.
What is the current scenario of the housing market?
Currently, the price of houses have been increased to about 13.5% over the last year, according to the Core Logic reports. It might represent a slowdown, but by seeing the historical graph it is still on the higher side. And during this time, if you are a first-time house buyer I would suggest you wait for the numbers to work. Do not buy a house today, at an increased price and interest rates, rather wait to build equity today to find yourself in a better position to purchase a house in the future. It would be an intelligent move, to wait for the market to cool down and meanwhile find opportunities to make your income grow.
But if there are any emergent cases and you want to purchase a house now, then you can smartly stretch your dollars by:
• Putting or depositing your down-payment money in a high-yield account
• Connect to a mortgage lender that charges low or no fee at all
• Lock in your mortgage rate with the lender while applying for a loan
Understanding the various aspects of interest rates is extremely important, as they would help you to make a financially sound mortgage decision. Well through this sweeping article, you must have understood how inflation is responsible for the rise of interest rates and how they in turn affect the housing market as a whole. Thus, to conclude I would like to say that the cost of mortgages and interest rates are closely knit with each other. But in reality, when the houses are sold, they do not always appear in correlation with the interest being charged. When the rate of interest is low, the demand for houses increases, which in turn put their prices on an upward scale. But when the prices get too high, the demand may cool down resulting in the price of houses descending.
Apart from this, if you are interested in buying a luxurious property in Middle Tennessee then you should connect to me, Joni Miller through JoniMillerhomes.com. I am in the business of selling luxurious dream homes to people in Tennessee for the past 18 years. I have extensive experience in the housing market, as I deal with first-time home buyers, and someone interested in buying a commercial property, and have also locked certain multi-million dollar deals by selling luxury homes. I also have expertise in real estate legal documentation which proves to be extremely beneficial for my client base. I am proudly ranked as one of the top three agents who work for Park Realty.
