We are currently going through a period of time where mortgage interest rates are at or near record lows for a significant period of time. This creates a number of ramifications and impacts when it comes to real estate, especially in regards to creating demand and the ability of potential buyers to purchase a home. Obviously, when interest rates are lower, a buyer is able to buy a more expensive home (for their money), because the amount of monthly payments is a key consideration in determining how much a lender will approve. However, in many cases, this increases, the demand also, and, therefore, based on the economic theory of Supply and Demand, many times, it ends up – raising house prices, etc. With that in mind, this article will briefly attempt to consider, examine, review, and discuss 5 ways low interest rates impact the real estate market.
1. More house, for the money: For each percentage point, mortgage rates fall, there is a significant drop in the amount of the monthly installment. This means potential buyers may be willing to look at places priced higher than they might otherwise pay.
two. More people qualify: Mortgage lenders have strict qualifying standards, based on a number of variables, including: credit history; percentage of total debt; home debt percentage; etc. These percentages are based on the amount of the monthly payment, compared to one’s monthly income! When there are lower rates, this means a lower payment is needed every month. The result of this is that as long as a person’s credit history/score qualifies, the number of people who will qualify (and/or are eligible for more financing) will also increase.
3. Lower construction costs: When money becomes less expensive, it also reduces the cost of renovation and/or construction expenses! In general, loans of all kinds become more attractive when rates decline.
Four. Increases buyer demand: This often becomes more complicated, because it creates an increase in buyer demand, which, in general, causes the costs of houses to increase. So there may be two competing forces involved: more people qualify due to cheaper money, versus Supply and Demand, forcing things to move, sometimes, in the other direction!
5. New construction and / or important reforms: Cheaper money costs often make new construction and major renovations more attractive, because they become more affordable, in terms of financing costs, etc.
Many factors affect the real estate market. However, lower rates to borrow money can be one of the most predictable factors.