The Federal Reserve, which is colloquially known as “the Fed,” has proposed to raise interest rates as early as this March. If it goes forward with this plan, it could substantially increase the interest rates for loans of all types, including mortgages. For prospective home buyers and others looking to purchase real estate, it could make efforts to make those purchases a much more expensive proposition.
What is the Federal Reserve?
The Federal Reserve is the central bank of the United States, which exists to help regulate its currency and financial markets. Among its biggest responsibilities is helping to maximize employment, stabilize prices, and manage interest rates. One of its principal tools for doing this is setting the interest rate at which it lends money, which in turn affects the interest rate for all lending throughout the financial system.
What is the Fed Doing?
The Fed has proposed raising the interest rate potentially multiple times over the next few years. In effect, it will increase the amount of money that people will need to pay for mortgages and other loans. It is also ending a series of bond purchases made over the past year, which were made to help buoy the economy from the effects of the COVID-19 pandemic. In total, this means it will be much harder for individuals and businesses to borrow money.
Why Are They Doing This?
A number of “easy money” policies adopted throughout the past few years helped to maintain a steady economy by making it easy to borrow money. However, this has caused inflation to rise over time, devaluing the currency and making purchases of all kinds more costly. By raising interest rates, it will help to tamp down on inflation, hopefully to bring the financial system under control and avoid a worst-case scenario, such as hyperinflation.
How Will This Affect the Real Estate Market?
For anyone looking to purchase real estate, an increase in interest rates means that borrowing for a mortgage is going to get significantly more expensive over the coming months and years. It is also going to make it less attractive to refinance a mortgage, since the higher interest rates could mean that someone pays more interest on the refinanced mortgage than they did on their original mortgage. Thus, economic analysts expect the coming rate hikes to tamp down on consumer demand for real estate, which is currently outpacing existing supply by a substantial amount.
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