We’ve enjoyed bottom-of-the-barrel interest rates for years, but that may be about to change. The Federal Reserve raised its key interest rate by a quarter-point last month, and we expect that to be the first of at least three interest rate hikes to happen this year.

 

So is the party coming to an end? What will happen to the real estate market — for homeowners and investors — in an environment of rising interest rates?

What Happens When the Fed Raises Interest Rates?

First things first, the Fed doesn’t dictate what interest rate your bank can charge you for a mortgage. That’s not the interest rate they control. 

 

What they do control is the Federal Funds Rate, the rate at which FDIC-insured banks are allowed to lend money to each other. 

 

Does this affect the interest rates you pay on your mortgage, car loan, or credit card? It can, but it’s not guaranteed. 

Why Does the Fed Raise Interest Rates?

The Fed may not directly control the interest rates banks pay, but by making it more expensive for them to lend, they are hoping that these interest rates trickle down to consumers in the form of higher interest rates on consumer loans, credit cards, and other loans. 

 

Why? Why raise interest rates at all? Don’t we have enough to worry about in terms of rising costs? Are the Fed just committed to being killjoys and party poopers?

 

Raising the Federal Funds Rate is one of several tools the Fed uses to try and control the supply of money in the economy. If it’s more expensive to lend to each other, banks will likely flood the economy with less financing. If money becomes scarce, it will become more valuable — which means it acts as a counterweight to inflation.

 

Considering inflation has tipped the scales at nearly 8% over the past year, you can see why the Fed would want to take this kind of action. Paying a little more interest may not be fun, but compare that to the recent increases to the price of gas and food, costing the average household over $5,200 extra out of pocket compared to last year.

What Will Happen to the Real Estate Market Now?

So if our historically low interest rate market is coming to an end, what’s next for real estate markets?

 

Actually, the real estate market has done relatively well in environments of rising interest rates, like those we experienced from 2004-2006, as well as 2018. Both of those eras experienced hot real estate markets.

 

The interest rate you pay for a mortgage has less to do with the Federal Funds Rate, and more to do with the demand for mortgage bonds — big bundles of mortgages that banks package together and then sell as an investment. If the demand for these bonds is high, it puts downward pressure on mortgage interest rates.

 

Right now, mortgage bonds are being bought up en masse by the Fed, of all things. Since the pandemic, the Fed has bought over $40 billion worth of mortgage bonds per month in an effort to keep the housing market hot.

 

Ultimately, the real estate market responds to the laws of supply and demand. Inflation and foreign conflicts have made the demand for US real estate high, while the demand for mortgage bonds is likely to slow any coming increases in mortgage rates.

 

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If you want to take advantage of historically low interest rates while they last, Martel Turnkey can help you act fast by putting the right investment property in front of you — rehabbed, rented, and ready to buy.  Lock in for now for 30 years and you will be glad you made this decision.