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Anonymous asked in Business & FinanceRenting & Real Estate · 6 years ago

How does interest rates affect real estate?

I have to write a 3 page paper about this. I already know the basics of this answer but what more can I write other than high interest rates make your mortgage more expensive in

2 Answers

  • Anonymous
    6 years ago
    Favorite Answer

    Lower interest rates allow more people to be able qualify to purchase a home, thus more people can afford to purchase. At the same time because more people are able to purchase homes it reduces the amount of homes on the the market (reduces the supply) which in turn pushes up the cost.

    Conversely, when interest rates are high fewer buyers are able to qualify for a loan which increases supply. Over supply tends to push prices lower.

    I've heard that whenever interest rates rise .25% it disqualifies about 100,000 people/families from being able to purchase. In times of high employment artificially low interest rates tend to over-heat the real estate market, and the economy in general, by increasing demand. We saw that a few years ago when the RE market balloon out of control and eventually blew up and prices tumbled and foreclosures skyrocketed.

    Generally speaking lower interest rates effects home buying more favorably even if it tends to reduces the supply. The most negative factor that effects home values and purchasing a home is a high unemployment rate. In todays real estate market with both the lowest prices in recent times and interest rates at 50+ year lows, because of double digit unemployment rates the RE market is still in the toilet in most areas.

    High unemployment also means more foreclosures which in turn forces values down because it increases supply. At the same time the high foreclosure rate reduces the supply of rentals, thus increases demand for rent units which helps drive up the cost of rentals..***:D

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  • glenn
    Lv 7
    6 years ago

    I have sold houses for 36 years. If interest rates go up it does make the homes less affordable. In the early 1980's one weekend the mortgage rates jumped from 9.5% to 13.5 % from Friday to Monday.

    All the sudden people that thought they could afford a $150,000 home were instead having to look at a $90,000 home. The much lower demand also pulled sale prices down and drove builders out of business.

    But a small rise in rates can actually drive buyers to buy quickly if they fear rates will go up even higher soon- sometimes a small drop in rates can entice people to wait to buy in case rates continue to go down. This is a pretty complicated relationship.

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