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Understanding How Interest Rates Affect the Housing Market

By Guest Author | February 8, 2016

Interest rates strongly affect the housing market as most real estate is purchased through borrowed money. The cost of borrowing money through mortgages is directly tied to interest rates. The main ways that money is borrowed through mortgages are fixed rate and adjustable rate mortgages.


Why and How do Interest Rates Affect Real Estate Values?

Higher interest rates cause the monthly payment needed for housing to increase. Since many individuals look to see what their monthly payment will be when making an asset purchase, less people will be able to afford a higher monthly payment, and the demand for housing will decrease. This decrease in demand will cause a decrease in housing market values as higher interest rates make real estate purchases less affordable.

Lower interest rates are thought to be indicative of a more efficient real estate market as they cause a reduction in borrowing costs. A reduction in borrowing costs will lead to an increase in housing market values. Another example of how efficiency can reduce cost is through property management software. Property management software has helped reduce the cost to manage real estate. If the cost to manage property is less, housing market values will rise because it is a less difficult to own the asset.

Another secondary factor that affects the housing market is that higher interest rates will cause a stronger United States dollar that will reduce the demand from foreign sources of real estate in the United States. This reduction in foreign demand will also cause a decrease in housing market values. Foreign demand for housing has been responsible for some of the high real estate price growth in coastal areas of the United States.

Current Thoughts on How Interest Rates Are Affecting the Housing Market?

Interest rates have been kept at historically low levels since the Housing Bubble of 2007-2009, many economists believe that asset values have been inflated by extremely low interest rates. Housing market values and stock market asset values have increased both by around 50% over the last seven years and many believe the cause is interest rates and leverage.

Interest rates are a very important factor in the value of assets in the housing market. Since the values of the housing market are tied to interest rates, interest rates are a crucial factor in determining how strong the real estate market is.


About the Author: Lizzie Weakley is a freelance writer from Columbus, Ohio. She went to college at The Ohio State University where she studied communications. In her free time, she enjoys the outdoors and long walks in the park with her 3-year-old husky Snowball. The information in this article is credited to Rentec Direct.

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