Rising interest rates are trending and most likely here to stay.
BRIAN BIRK | 3-MINUTE READ
The idea that home buyers should get used to rising rates stems from economic trends, historical data, and the nature of cyclical economic activities. Here are some reasons why home buyers might need to adapt to this reality:
- Historical Perspective: Interest rates have historically moved in cycles. Periods of low rates have often been followed by periods of rising rates. While they may be at historic lows at a particular point in time, that doesn’t mean they’ll stay that way indefinitely.
- Inflation Concerns: Central banks, like the Federal Reserve in the U.S., often raise interest rates to combat inflation. When the economy is growing robustly and inflation begins to rise, raising rates can be a tool to cool down an overheating economy. With the global trend of significant government spending and fiscal stimulus in response to crises, there can be upward pressure on prices, leading to inflationary concerns and potential rate hikes.
- Economic Recovery: As economies recover from downturns or recessions, it’s common for central banks to gradually raise interest rates to more “normal” levels. This helps to keep the economy from overheating and to ensure that lending practices remain prudent.
- Lending Practices: When rates are too low for too long, there’s a concern that banks and other lending institutions might take on excessive risk, as they seek to make loans and get returns on their capital. Higher rates can ensure that only the most qualified borrowers are getting loans, which can lead to a healthier overall lending environment.
- Real Estate Bubbles: Continuously low rates can lead to asset bubbles, especially in the real estate market. When borrowing is cheap, it can push up home prices as buyers are able to afford more expensive homes. Rising rates can help temper these price increases and lead to a more stable real estate market.
- Global Economic Factors: We live in an interconnected global economy. Rising rates in major economies can influence rates in other countries, either directly or indirectly. For example, if the U.S. raises rates, it can make U.S. assets more attractive to investors, pulling capital from other countries and potentially leading to rate increases elsewhere.
- Long-term Financial Planning: For those who are used to low rates, it might seem like a shock when they start to rise. However, from a financial planning perspective, it’s prudent to factor in the potential for higher rates in the future. This can mean being more conservative when estimating how much house one can afford or being prepared for higher monthly payments in the future if one has an adjustable-rate mortgage.
That said, predicting the exact trajectory of interest rates is challenging. Many factors, both domestic and international, can influence their direction. But understanding the underlying dynamics can help home buyers make more informed decisions and be better prepared for various scenarios. Get in contact with one of our Mortgage Brokers today and let us shop from 50 of the top rated lenders in the nation.