How will Interest Rate Affect the Real Estate Market?
The real estate market has performed well in recent years. One of the major reasons for rising prices and increased demand is a low interest environment that benefited the sector (During the last decade, interest rate in the U.S. was not higher than 1 percent. In Europe and Japan, the rate is 0 percent).
In addition, the standard of living in the United State has also increased. As data show, during 2016 Q4, average wage went higher by 2.9 percent. Practically speaking, people can afford to pay a higher mortgage.
However, the Fed, encouraged by the improving economic conditions, is determined to go for a rate hike in the course of the coming months and the result is inevitable: your mortgage will be more expensive and, therefore, affordability to buy real estate assets will decrease. Today, close to 80 of home buyers across the country, pay mortgage. Every rate hike will have profound effect on them.
Experts can tell that in 2016, home value soared by 7 percent. In the course of 2017, value will further rise by 4.5 percent. The growth in wages will not be able to catch up.
So should we prefer renting over buying?
The answer is no. To make renting more worthwhile, interest rate needs to be higher than 5%, and that probably is not going to happen in the near future. The decision makers in the Fed have no desire to generate a housing crisis similar to what happened in 2008, and so they will exercise much caution when it comes to rate hikes.
To sum up, it is still going to be a good option to buy even though prices might get lower a little due to decreasing demand.