Interest Rate Effect on Real Estate
Buying your own home is part of the American Dream. Of course, most buyers cannot afford to purchase property in cash and take out mortgages to finance the transaction. Lenders are then compensated at interest rates that affect the overall demand for real estate.
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Identification
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Interest rates are described as the "cost of money." In general, interest rates increase during times of economic growth. Conversely, the Federal Reserve Board takes steps to lower interest rates amidst a recession.
Features
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Higher interest rates make mortgage payments more expensive and reduce demand for real estate. This reduced demand may lower prices. Lower interest rates reduce the costs of financing and provide support for real estate prices.
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Considerations
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Real estate may be bought for investment purposes. Investors are more likely to receive rental payments that are above mortgage costs during low interest rate periods. Real estate investment also becomes more attractive in comparison to low returns available upon cash and bonds.
Misconceptions
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Interest rate fluctuations are difficult, if not impossible, to predict in the short term. Markets do not always react quickly to Federal Reserve monetary policy.
Risks
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Rising interest rates are especially risky for adjustable rate mortgagees (ARMS). ARMS carry variable rates that adjust after an initial period--making payments more difficult to afford.
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References
Resources
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