Introduction to the influence of Interest Rates on Real Estate
Introduction
One of the industries most exposed to changes in economic policies is real estate. These last few months and years have been no exception. The following article will explain why and how it has been affected and what can we foresee will happen in the following months. The main ideas to be presented are a brief explanation on interest rate and its evolution, some common and less common definitions, followed by an analysis of the housing market in the last couple of years, and finally, a short-term outlook and conclusion. The goal of this piece is to help you better understand better how the market is affected, and what the future holds.
Interest rate and its evolution
The benchmark interest rate is the rate at which the Federal Reserve (Fed from here on forward) lends money to banks. It varies depending on the monetary policy, contractionary or expansionary. This has further implications for the interest rate banks offer consumers, which consequently increases or decreases.
The contractionary monetary policy in the US has raised the benchmark interest rate to its highest point in 22 years.
This mechanism established by the Federal Reserve intends a drop in inflation by increasing consumer borrowing costs. Consequently, a greater cost to acquire debt, in turn, is expected to reduce consumption.
A brief comment on inflation
In particular, there has been an upward trend since the beginning of 2023 driven by the commitment of the Fed to reach target inflation of 2%. The Federal Reserve has gradually raised the interest rates from 4.5% in January to 5.5% in November. However, the increase in the interest rates has yet to help reach the previously mentioned target of 2% inflation.
Furthermore, there was a decrease in inflation in the first semester of the year, reaching 3%. However, core inflation remains elevated despite the mitigation policies. The effects of the monetary policy are yet to appear. A new increase or, in any case, sustained economic tightening is expected.
Undoubtedly, pivotal sectors of the economy will be affected. Amongst these, the real estate market is known to rely heavily on monetary policy.
