Interest Rates' Effect on Property Values

by c21commonweath_ldowling 20. September 2019 13:40

Interest rates, especially the rates on interbank exchanges and Treasury bills, have a profound effect on the value of real estate and many other investments. Because their influence on home values is so visible, many people incorrectly assume interest rates are the biggest driving force in real estate valuation—this leads to poor decisions. As of this writing, 30-year fixed-rate mortgages have a 3.6% interest rate, and the rate is trending down. Many homeowners are waiting for interest rates to decline, hoping to get a better price when they sell. Buyers may hope to purchase a house quickly before prices go up—however, interest rates are only one factor influencing property values.

Interest rates have a significant impact on the economy, influencing property values in various ways. When interest rates are low, buyers may be willing to spend a little more on a home, while higher interest rates can make buyers reluctant.

Supply and Demand Make a Difference

When the market for homes is down, builders can make more money on high-end homes. This can lead to more competition for entry-level homes and drive prices up. When you combine lower interest rates and the higher prices they generate with a short supply of homes, you are looking at a sellers’ market.

Interest Rates Affect Home Values Indirectly

Interest rates don’t affect home prices directly, but their impact is clear. Rising interest rates over a longer period may lead to weaker demand, especially in the lower end of the market. Falling interest rates can lead to greater demand.

It's a Personal Decision

Interest rates can have a powerful impact on home prices, but they are not the only factor (or even the most important one). The current interest rate is under 5%, which is remarkably low historically. If you’re considering purchasing a home, your income, family situation, and plans for the future should influence your decision much more than interest rates do.

Play the Long Game

The current interest rate matters in real estate valuation. Rising interest rates drive prices down and falling interest rates drive prices up, but in either case, it's a long-term proposition.

Interest rates are easy to track and tempting to focus on, but they’re only one of the many factors that influence property values. Do you think the time is right for you to buy or sell your home? Your best move is to speak with a real estate professional first.