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Interest Rate Rise

May 1, 2015 | Matt Lemmon

The economy, both by nature and definition, is a series of trade-offs. One person gets some form of currency while another gets a good or service; it's the oldest story in the world (or one of them). It takes millions of transactions, and adjustments on the way, to keep an economy in working order.

One of those adjustments, expected at some point in the short to mid-term, may very well be the Federal Reserve deciding to raise interest rates after years of zero or near zero levels. One of the primary goals of these low historically low rates has been to boost the housing market. Lower rates mean buying is attractive to more people, which leads to more people selling, which means more commerce.

As the economy continues to climb out of its late '00s recession, it's not immediately clear what this potential rise in interest rates would mean for the housing industry. A few recent articles take a shot at explore just that.

The Motley Fool - always a great spot for easy-to-understand financial advice - ask three experts, whose opinions differ a bit.

The experts generally agree that higher rates could dampen buying action a bit (people who have locked in at 4 percent are much less likely to take on a new mortgage at 6 percent), and also agree that higher-priced homes and markets with higher price points will feel the brunt first and most powerfully.

From the article:

Whereas almost any qualified homebuyer can purchase a "starter home," not everyone can afford a three- or four-bedroom McMansion in the suburbs. As rates rise, the monthly cost of servicing a mortgage on higher-end homes will push marginal buyers out of the market.

Something to remember, though, before you get too concerned: Overall, rising rates are a good thing. From the Motley Fool article:

Interest rate fluctuations are a normal part of a healthy housing market and shouldn't be feared. In fact, a rate increase is a good indicator that the housing market and overall economy are improving.

A second article, from U.S. News, is aimed at buyers, and could provide some good advice for Realtors to give buyers who may be on the fence about signing on the dotted line. For starters, rates are still low (if not as low as a few months ago), so buying now will guarantee you aren't caught in a pickle by a Fed rate hike. Secondly, now is simply a good time from a market standpoint. Foreclosures are down (meaning fewer investors paying cash for premium properties) and inventory is, largely, up. There are some great homes out there to be had at good long-term rates.

The full U.S. News article can be found here

Finally, former Federal Reserve Chief Ben Bernanke wrote about interest rate hikes on his blog today, which partially explains why he advocated keeping them so low during his time at the Fed. Interesting stuff to anyone who is interested in the inner workings of the economy. Link

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