Tuesday, January 27, 2015

Real Estate, The Fed, and You

The Chairwoman of the Federal Reserve has been making serious noises about raising the cost of funds, and causing interest rates to rise at long last.  Although the timing is not certain, it does seem clear that rising rates should start by the middle of this year.  Obviously, that is big news for real estate, since mortgage rates direct affect sales of properties; as the cost of monthly ownership goes up, people can afford to pay less for the home or building, and the number of people who can qualify at all goes down. Clearly, although there are broad signs of economic improvement across most of the country, the Fed is worried about disturbing the fragile real estate recovery, and rightly so.  However, rates have been so low for so long that there seems to be no other alternative, so the question is simply when it will happen.

The funny thing about the effect of rising mortgage rates on real estate is that buyers don't seem to be spurred by talk of rising rates.  Until rates actually go up--then they rush to act.  Therefore, in a way, rates going up will help us, since our problem locally is that languishing prices have caused buyers to hesitate and dither, since they don't seem to be worried that anything they are considering will get sold while they are on hold.  Once they see the consequences of having waited, they begin to feel some urgency.  And that causes bidding wars, competition, and, ultimately, rising prices.  The buyers then face a double whammy, of rising mortgage costs and increased sales prices.  So why don't they act before this begins to happen?  Only specialists in consumer behavior know!