WHEN INTEREST RATES CHANGE
by Matt Dutton, State Certified Trainee Appraiser
August 2019
The housing market seems to be booming across the country, spurred in no small part by the Federal Reserve's continual interest rate cuts. Lower mortgage rates, coupled with a strong labor market, caused home sales to exceed expectations last month. According to a Reuters article (see link below), existing home sales rose to a seasonally adjusted rate of 5.42 million, surpassing the original forecast of 5.39 million units in July. This was the first time in almost a year and a half that this figure was higher than the previous year's figure. This is because the housing market struggled the year before due to constant interest rate hikes.
A steady stream of rate cuts since December — the first cuts since the recession in 2008 — have been a boon to the housing market. The Fed drops interest rates to encourage borrowing and to spur the economy on. Similarly, it raises rates periodically to cool the economy. The Fed alters the rates to keep pace with inflation. When inflation is low or stable, people don't have to worry as much, and the rates can be raised. Rates drop when the economy slows. The consequences of the Fed's decisions have wide-reaching effects that extend well beyond the housing market, into the stock market and basically any form of credit in this country.
The question is, how does this affect our housing market?
Rural areas like ours generally react less dramatically to the ebbs and flows of the economy, in comparison to more metropolitan areas. However, a consistently low interest rate can draw new buyers into the market who can more easily obtain credit. This drives prices up. If these prices push up too high though, they can price many would-be buyers back out of the market. For instance, Palmyra and the other smaller communities along the Missouri side of the river have seen a spark in demand in recent years. This has pushed housing prices up beyond where they would be if they were solely keeping pace with inflation. This isn't to say that all market participants are priced out of the market around here. It just means a dollar doesn't go as far as it did.
It's hard to predict what impact the Fed's manipulation of the interest rates will have on the housing market locally. With President Trump pushing for more rate drops, it could draw more new would-be buyers in and drive housing prices up even further. In more rural markets like ours, the number of would-be buyers is limited, so the impact of more interest rate drops could be minimal. Really the only thing that is safe to say is that the interest rate won't remain the same for very long.
For more information, visit:
https://www.businessinsider.com/how-the-fed-raises-interest-rates-2017-12
Spurgeon Appraisals regularly appraises a variety of property types. We have experience appraising farms, residences, and commercial properties. We pride ourselves on providing excellent customer service and quality appraisals. Contact our team to see how we can meet your appraisal needs and exceed your service expectations.
