Will Rising Interest Rates Hurt Investment?
With the Fed planning to raise interest rates again, it is only a matter of time before the cyclical trend kicks in and home sales stall, as buyers are nervous about high rates and increasing mortgages. But, the question is, when exactly does this go into motion? Can historical data surrounding this trend predict when the current residential real estate market will falter?
The most important rate for these predictions in the US is the Fed Funds Rate, which is interest rate that banks charge each other to borrow money on an overnight basis. In addition, the 10 year treasury bond rate is also important, because it acts as a barometer for inflation levels and fixed mortgage interest rates tend to rise or fall with it. These are predictive models’ best bet on determining exactly when the market will start to tip to one side or the other.
There are other things to add into the model as well, since interest rates and home sales are not directly correlated with each other. For example, the new property tax bill is sure to affect the market, as well as the fact that there seems to be a housing shortage. This leads to home prices rising disproportionally to salaries, which will definitely affect how people can buy and afford homes.
So far, despite the signs pointing towards a market slow-down in the near future, experts are optimistic. So far in 2018, five months saw lower sales numbers than in 2017, but home price appreciation is still strong. Investors are also factoring in the influence of high employment rates, rates that are still relatively low, and a new generation of Millennials entering the market and are continuing to lean towards a bullish outlook where the market remains strong for at least the remainder of the year.