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Interest rates significantly influence the dynamics of the real estate market. Understanding how interest rates influence real estate can be crucial for making informed decisions, whether you’re a real estate sales agent, a homeowner, a prospective buyer, or an investor.

Let’s take a quick look at a real estate update for May, highlighting interest rates and how they affect the real estate market.

Mortgage Interest Rates – A Brief Introduction

real estate update

Generally, interest rates represent the cost of borrowing money and the return on lending capital.

The Federal Reserve is the Central Bank of the US. They loan money to banks and financial institutions. These same financial institutions then loan the money to the public at slightly higher rates.

Basically, when the economy is growing, prices go up. This dynamic is referred to as inflation. Inflation can seriously harm an economy for years if it gets out of control.

One way to address inflation is to limit the amount of money released into the economy. If less money is available for investment, business growth, and purchases, the economy tends to slow down, thus slackening inflation.

How does the Federal Reserve limit the amount of money in the economy? It raises the interest rate it charges the banks when borrowing money. Higher rates usually mean less borrowing, thus less money getting into the economy.

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The Market Effect of Mortgage Interest Rates

real estate update

When interest rates rise, borrowing becomes more expensive, leading to higher mortgage rates. Conversely, mortgage rates tend to decrease when rates fall, making homeownership more affordable and stimulating demand in the real estate market.

Lower rates translate to lower monthly mortgage payments, making homeownership more accessible to a broader population segment. As a result, lower rates often increase demand for homes, driving up prices.

The reverse is true when rates go up. Higher interest rates mean higher monthly mortgage payments, dampening the demand for home buying.

However, higher interest rates also deter homeowners from selling. If your current mortgage interest rate is low, say around 3% to 4%, you’ll think twice about selling your home only to buy another one, except this time paying 6.5% to 7% on a new mortgage.

Will the Interest Rates Come Down in 2024?

real estate update

When it comes to the economy, no one has a crystal ball (not even Jerome Powell, the Chair of the Federal Reserve).

Earlier this year, inflation appeared to be decreasing, and the Federal Reserve signaled that they expected three modest rate cuts by fall 2024.

However, in the past few weeks, inflation has held steady, and the economy overall appears to be growing faster than expected.

In light of this new data, the Federal Reserve has begun indicating that any near-future interest rate cuts are unlikely.

Might the rates still come down later in 2024? Stay tuned, and we’ll find out soon enough. 

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Gregory Gronbacher

Real Estate Sales Agent / Professional Blogger

Gregory is a real estate sales agent and a state-certified instructor of real estate licensing and law. Originally from New York City, he's called Grand Rapids, Michigan home since 1995.

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