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How Mortgage Interest Rates are Affecting Buyers

Rising Interest Rates and the Real Estate Market

If you are in the market to buy or sell a home, you undoubtedly are concerned about inflation, rising interest rates and the overall economy. Much of the concern is warranted, as the economy and housing market is still going to be going through some pandemic related shake ups for the foreseeable future.

It is important to note that the economy has lots of moving parts and predicting with any accuracy what is going to happen in the short term is impossible and quite frankly in the realm of hucksters and fraudsters. We do know, however, that the Federal Reserve has stated interest rates will rise throughout the year and that inflation is at roughly 8% annually. With this data, and our experience coupled with what we are currently seeing in the Fort Lauderdale market, we can shed some light on what is likely to unfold and how to successfully navigate the waters.

Interest Rates and the Housing Market

There is a common misconception that low interest rates are good for the economy and high interest rates are bad for the economy. That is actually looking at things backwards. The Federal Reserve Bank controls interest rates by setting what is called the Federal Reserve Overnight Bank Funding Rate (OBFR). This is the rate that is used for short term loans among banks.

The Federal Reserve attempts to set the rate to what will keep the economy as healthy as possible over the long term. The theory is that if rates are low, businesses will be incentivized to make capital investments until the market becomes oversaturated and then crashes. So as the economy grows, rates rise in an attempt to gently slow the economy in order to avert a crash.

As it stands today, we are just coming off a long period of historically low interest rates. The Federal Reserve has announced it will be raising rates roughly every six weeks throughout the remainder of the year. It is important to note that rates are still below the historic average, and are only expected to rise to near the historic average. The talking heads on CNBC using words like “skyrocketing” are either ill informed, or more than likely, just want to make a compelling sound bite.

Inflation and the Housing Market

         Inflation is the other economic statistic that is being talked about currently. The most recent data we have says that the annual inflation rate is about 8.3%. That is indeed quite high and will have an effect on home prices and the overall economy. There is evidence that suggests we are currently at the peak of inflation and that going forward, the inflation rate will be coming down, although it still may stay relatively high for some time.

Inflation, it is important to note, is not even across the board. For example, gasoline prices have obviously risen much more than 8.3% over the past year, and as it stands right now, it appears the prices of used cars are actually on the way back down after historic highs due to the pandemic. What will happen to the housing market is still unclear.

Short Term Effects on the Housing Market

         Rising interest rates means higher monthly mortgage payments, which in turn should push home prices lower. Let’s say a buyer can afford a $2,000 a month mortgage payment. With rising rates, that payment buys a less expensive house. As of now, the date objectively says that has not yet happened, both nationwide and especially within the Fort Lauderdale area.

What has happened is that potential buyers who may have been delaying their home purchase have been moved to action by rising rates. In other words, higher rates have not slowed down the market, but the knowledge that rates will rise throughout the year have caused a short term rush in people getting their transactions completed before rates rise further. This is especially true in the Fort Lauderdale condo market. That eventually will most likely subside and home prices will level off, but with higher monthly mortgage payments. Get in touch with your Fort Lauderdale Realtor to find out when is the best time to buy in this market, believe it or not there are opportunities starting to appear.

It is also important to note that the macro trends in the economy tend to be somewhat muted in places like South Florida. Cities whose economies are based on heavy manufacturing, like the Rust Belt cities around the Great Lakes, tend to experience booms and busts as the economy ebbs and flows. The Fort Lauderdale area is more immune to those swings since our economy is based on industries like tourism and technology as opposed to cyclical manufacturing.

Looking Forward

         Looking forward, we know that interest rates are going to continue to rise, which will bring housing prices down. In addition, over the past two years we saw so many people migrate from densely populated areas to the suburbs who needed more space to facilitate work from home and social distancing needs. As mentioned, with rising rates dropping home prices, that does not mean your corresponding monthly mortgage payment will also be dropping, that will probably be going up. The most likely scenario is that rising rates will push up monthly payments more than falling home prices will push payments down. If you are in the market to purchase a home, it is best to act sooner than later.

For potential home sellers, you are also incentives to act quickly. Home prices are likely to drop going forward. There is always a lot of talk about whether it will be a “seller’s market” or a “buyer’s market”, well in this case the most likely scenario is it will be a “banker’s market” with the banks charging higher interest rates than we are accustomed to. But again, do not let this alarm you, rates have been historically low for some time and are only moving back to the historical average. There have also been so many real estate transactions over the past few years that both supply and demand are likely to decrease.

So moving forward, the same rules still apply. Make sure you have a trusted and knowledgeable Fort Lauderdale Realtor who knows the Fort Lauderdale area in your corner working for you and looking out for your best interests. It is more important than ever to have a professional on your side with a thorough understanding of the local real estate market.

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