This past December, the Federal Reserve raised interest rates for the first time since the financial crisis and Great Recession started 7 years ago. Now, the Feds are considering raising rates again in June. Here’s what a Fed interest rate hike means, and how it affects potential home buyers, owners and sellers alike.
Many economists were convinced that the Feds wouldn’t raise interest rates until 2017 at the earliest; however, just a few weeks ago in late April the Feds announced in a frank statement that an interest rate hike may be imminent. On the one hand, this is a sign that the Feds are feeling more optimistic about the US economy being stable enough to handle an increase, on the other hand, raising interest rates too early may destabilize an already uncertain economy.
Effects of a Fed Interest Rate Hike on Real Estate
The effect that an interest rate hike would have on the housing market is still uncertain. However, there are a couple of possible benefits:
With higher interest rates, banks and other financial institutions are often more willing to part with their money. A Fed interest rate hike means they have a greater incentive to lend to aspiring homeowners including those who may not currently qualify.
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Higher mortgage rates could, at least initially, encourage on-the-fence buyers and prompt a surge in home sales. This in turn would increase demand, prices and home equity, which is great news for current homeowners and those looking to sell this year.
In addition, an interest rate hike would mean higher returns paid on savings. For many people, this means an increase in financial security and confidence in the economy, which in turn may stimulate home sales.
However, economists warn that a rate hike does not guarantee a housing market surge. Members of the Millennial generation, who are at the prime age to buy a home, are burdened by student loan debt and very hesitant to invest in real estate after witnessing the effects of the Great Recession. Even higher interest rates would be unlikely to push them into buying their first home, making the rate hike even more insignificant.
Without a robust economy and willing buyers to back up the interest rate hike, home sales may still not rise significantly, and the economy’s growth may even slow further. It’s a gamble on the Fed’s part, but if it works, it will be a welcome change for everyone in the housing market.