Rising Interest Rates and Possible Affects on Property Owners & Investors
The Federal Reserve’s job is to manage the U.S. economy by controlling monetary policy. Most notably, the Fed controls the supply of money in the country. It has multiple tools for accomplishing this task. One of its most effective tools is the federal funds rate—the interest rate at which financial institutions charge each other for overnight loans.
Members of the Fed’s Federal Open Market Committee meet several times each year to make decisions about the economy. They do so by analyzing a broad range of economic indicators, most notably the country’s inflation and employment rates.
Why Does the Federal Reserve Raise Interest Rates?
The Federal Reserve is essential in guiding the entire economy. When the Fed raises the federal funds rate, the goal is to increase the cost of credit throughout the country’s economy.
This can happen because the economy is growing too fast, as raising the federal funds rate impacts other important interest rates such as the prime rate. Those who can’t afford to pay higher interest rates may put off projects that require financing. This reduces the amount of money in circulation and ultimately lowers inflation.
How Can This Affect You?
Raising the federal funds rate influences the entire country’s economy and can drastically impact you as a property owner or investor. The Fed’s decision to raise the federal funds rate affects everything from credit card rates to auto loans. But, the most notable effect for property owners and investors will be the Fed’s influence over mortgage rates and property value.
Mortgage Rates
While the Feds don’t directly control mortgage rates, any increase to the federal funds rate can impact the market. Variable-rate mortgages like adjustable-rate mortgages and home equity lines of credit are tied to the prime rate, which is influenced by the federal funds rate.
Fixed-rate mortgages, by comparison, are influenced by the domestic 10-year Treasury bond rate. However, this is tied more to investor sentiment about the economy. Therefore, a raised federal funds rate may not result in higher fixed-rate mortgage rates.
Property Value
Higher interest rates and inflation typically decrease the demand for housing and investment. This, in turn, decreases the value of homes, resulting in lower house prices. When mortgage rates are low, houses become more affordable and thus more appealing for potential owners and investors to purchase. Now that interest rates are increasing, fewer people will make big purchases. It will also cause the cost of any available property to fall.
Improve Your Investment Strategy
The Federal Reserve’s decision to raise interest rates reflects a strengthening economy. This is good news for property owners and investors. As the economy grows, more people will be in the market for homes and other properties.
Please reach out to our team at Sea Scape Properties today if you have questions about how this year’s rate hike could affect your real estate investment strategy. Whether you’re already a property owner or are considering buying in the future, SSP is here to help you maximize your return on investment. Email to [email protected] or call 910-332-7284 ext. 103.