For the first time since 2006, the Federal Reserve is indicating that it will raise its benchmark interest rate. Although the overall economy might not be in the best of shape, there has been enough progress across the board to warrant this decision.
Interestingly enough, those in the housing industry who seemingly would be the most affected are not panicking because of this decision.
In general, housing gets hit on two sides when the basic interest rates go up:
- First, higher interest rates mean that the cost of construction-company loans to build new houses goes up.
- Second, lending rates for potential homebuyers go up as well.
However, despite that double effect, those in the real estate business are comfortable with the idea of having interest rates rise from the rock-bottom levels that they have enjoyed for past few years. If anything, the interest rates have been perceived as almost too low in certain circles, and a rise is needed to foster greater strength in the economy.
The true impact of rising interest rates in today’s real estate market
The rates will go up incrementally, so the impact will be far less than if the rise in rates were of a percent or more, which would have a much more dramatic effect. However, there are other reasons why the rise in rates will not have a detrimental impact, assuming that the economic conditions improve over time:
1. Housing inventory
In general, the number of homes available in the U.S. is not that high, which means that buyers have fewer choices when it comes to which home is right for them. However, the number of new residences available does vary from city to city.
For example, New York City is currently trying to expand on new home construction, while other markets (such as San Francisco) have seen considerable rises in rents and home prices because of fewer residences being on the market.
2. Unlocking homeowners
One interesting phenomenon is that many homeowners who make their purchases with rock-bottom interest rates have been rather reluctant to sell because they fear having to deal with rising interest rates when making a new purchase.
The announcement by the feds of rising interest rates might actually move some homeowners to act now to sell their properties.
3. Better credit availability
Since the housing crash of 2008, lenders have been generally reluctant to make mortgage loans, which has contributed to the slowdown of purchases.
However, there is a rebound that is slowly taking effect, which appears to be gaining in strength. This means that more people will be eligible to get the loans they need to purchase the homes they want.
4. Wage increases
One of the biggest issues with the current real estate market is that salaries on average have dropped for Americans, which translates into tighter budgets and less willingness to purchase homes.
Add to this the tougher lending conditions, and it is little wonder that so many people have balked at buying a home given the low interest rates.
However, higher interest rates are a sign that bigger paychecks for the average American are on their way as well. This is because rising interest rates are designed to combat the inflationary effects that are caused by people having too much money.
Greater wage growth means more confidence and an increased willingness to buy homes.
6. Shift away from renting
Added to the new construction is the emphasis on creating more homes, which naturally entices people to think about buying instead of renting. Even though mortgage interest rates will rise, the natural impetus during times of recovery is that more people start buying homes.
Given that the housing market has actually been fairly strong over the past few years given the negative conditions that have been present, the long-term trends indicate that more people will get out of renting and start buying properties.
The downside of hiking interest rates
Although there is plenty of evidence to show that the expected rise in interest rates will not have too deleterious of an effect, there will still be some negative aspects.
First and foremost, any rise in the interest rate will lead to concerns by potential homebuyers that this is not the time to buy a home. This is a natural result of having the rates start to rise.
However, because the rates are so low to begin with, this might not have nearly the effect that it normally has in the past.
Although there have been some lower trends in real estate sales reported already in some parts of the country because of the anticipated rise, it has not translated into anything serious as of this date.
The overall negative effects of any rise in interest rates are seen as short-term when it comes to the real estate market with long-term opportunities being present given the current state of occupancy rates. Furthermore, the economy is still not steady or strong in its recovery, which means that a downturn could signal a drop in the rates once again.
So, it is possible that a downturn could force interest rates to drop once again, but it would not be by much because rates are so low to begin with.
There are many different factors that play into rising interest rates that cannot be accurately forecasted, but overall the sign of rising interest rates means a growing, healthy economy, which traditionally has created more consumer confidence.
The most confident people are about their economic standing, the more likely they are to purchase homes.
Although the future is still somewhat uncertain, the feds raising interest rates later this year is a sign that things are getting better in the economy. As long as the belief holds true, then the result will mean a stronger real estate market with more transactions despite the higher interest rates.
Omri Barzilay is the CEO at Propcy. You can follow him on his blog or Twitter.