After the 2008 recession, many Americans lost faith in their banks and began looking for other options to put their money into. One of these options was investing in real estate market. Since then, real estate interest rates have been on the rise and are currently at the highest since 2008. If we continue this trend, how will it affect those who invested significant capital into real estate?
Real estate is one of the dominant assets
Real estate is one of the dominant assets in the United States. In 2013, real estate accounted for nearly $6 trillion in total investments. Real estate makes up an astounding 35% of Americans’ net worth in their bank accounts.
Real estate has such a high weight on all of our wealth while also being quite volatile can cause many people to underestimate its actual impact on our economy and overall financial stability. Theories are circulating regarding how interest rates will affect real estate; however, there is no definitive answer as to whether or not they will change the economy.
One theory states that the interest rates on real estate
One theory states that the interest rates on real estate and home prices are inversely proportional. That is, as the interest rate increases, housing prices decrease, and vice versa.
There is an inverse relation between home prices and real estate investment markets because of the nature of investing in real estate. Real estate is typically good to live in, while home prices are often seen as commodities.
When you buy a new car, your price can fluctuate slightly depending on what time of year it is and how much competition there is at the dealership. The vehicle will fluctuate, but it is unlikely that the price on the sticker will change by hundreds of dollars just because someone is willing to pay more than you are. It is how real estate works.
If a new economic theory were to be created that stated that interest rates should rise 50%, it wouldn’t change the price at which homes were sold. However, when interest rates go up tens of points, borrowing money for a car loan is more expensive. When this happens, fewer people can afford cars, and demand drops.
The real estate market causes manufacturers
The real estate market causes manufacturers to lower their prices so they can sell their vehicles and stay in business themselves. They then make less money, but that’s not even the worst.
When interest rates are this high, incomes cannot keep up with the actual cost of anything we buy. It means you either have to cut back on your purchases or get a job making more money than you ever have.
The other theory is that higher interest rates will reduce the amount of homeownership in America. The numbers show that people buy homes based on their incomes and interest rates rather than location or price, meaning that there is a possibility of fewer homes being purchased when borrowing money becomes so expensive in home sales.