How Do Higher Interest Rates Affect My Investment?

Interest rates always exert a significant effect on any investment one can make. That is naturally also true for real estate investments.

In general, higher interest rates have an adverse effect as they go together with a poorly performing economy. Higher interest rates always prevent consumers from buying goods and thus investors lose on investment opportunities. In the end, sales and profits drop as well.

But how does all of that affect real estate? How exactly do higher interest rates change real estate investments?

Real Estate and Interest Rates

The first thing you need to know here is that many often confuse what exactly affects real estate. Many wrongfully assume that the direct factor in real estate evaluation is the current mortgage rate. The influence comes from interest rates, as they have a profound effect on mortgage rates, which then, in turn, affect real estate worth.

However, that’s not all. Interest rates directly affect capital flows, which means that they also affect the supply and demand for property, which in turn changes the price of real estate. There are several other factors involved which we don’t have time to go into.

The important thing is that all of this is naturally not an exact correlation. With so many factors involved, it’s never possible to predict whether or not higher interest rates will result in a slower real estate market growth, fewer sales, and subsequently lower prices.

The Effect of Higher Interest Rates

First, it’s important to note that when we look at interest rates, we are mainly looking at the ones set by the Federal Reserve. They always affect all other essential interest rates as well, which makes their fluctuation vital.

In 2018, the Federal Reserve raised the benchmark rate and set it to 1.9% (it was near zero for several years prior) which can mean that the eventual outcome will be lower real estate value.

Historically, a rise in interest rates has meant that real estate value will drop. However, as there’s no direct correlation between the two, it’s hard to predict for sure whether or not property prices are going to fall.

What we also must take into account is the 2017 tax plan. It’s existence directly affects the real estate market through the cap it places on the deductibility of mortgage interest, and the higher state and local property taxes it created for specific regions.

With all of that said, it’s hard to tell with certainty if the whole market will negatively react to higher interest rates. What we do know though is that the market has been slower in 2017 and 2018. There have been fewer sales in the past year when compared to 2017, but the prices have remained strong. That can easily mean that the current higher rates might not have a significant effect on your real estate prices.

All in all, the current data points to the real estate market being healthy and showing promise that no significant negative change will occur soon. That in turn, makes your real estate investments safe and secure for the time being.