How Will Interest Rates Affect the Market in 2019?
Forbes and other reputable publications have predicted a continued rise in interest rates over 2019. The initial shock of the Fed's action caused a slowdown in real estate markets over the final part of 2018. As the shock wears off, experts are divided as to whether more expensive money will continue to translate into lower housing starts and occupancy rates for primary markets.
Many experts believe that the rising 2018 interest rates have not yet baked themselves into the real estate market. They point to past instances of relatively high real estate hikes and the slower uptake into the property market the following year. Proponents of fast action uptake point to a much closer relationship between federal interest rates and the consumer real estate market.
The Edge of the Housing Affordability Curve
Most consumers were hanging on the edge of housing affordability during the time of low interest rates, this set of experts argues. The second that the Fed raised interest rates, a portion of Millennials immediately became unable to buy a first house or even retain occupancy in more expensive real estate markets such as San Francisco, Los Angeles and New York.
The Fed's Limited Reach?
The Fed controls short-term rates, but the market controls long-term rates. Over time, these long-term interest rates will be much more influential on how the real estate market will perform over the next five years. Most experts expect commercial banks to try to hold down long-term interest rates to maintain a balance between supply and demand in new housing starts. They stand to lose money over the next few quarters if they cannot accomplish this. However, the banks may struggle to control long term interest rates due to news of the Fed raising interest rates which may scare some people out of the market.
Millennials and Secondary Markets Run the World
For those who want to draw a trend line moving forward, real estate activity in secondary markets may be a good leading indicator of how the rest of the market will behave. Watching cities such as Nashville, San Diego, San Jose and Dallas may provide insights as to just how many displaced Millennials will be able to access the housing market in the United States over the next few years. This is the core group that will control housing prices in America, so they are the ones to watch in terms of movement.
For up-to-date financial information, be sure to contact a trusted mortgage advisor.
Frequently Asked Questions
The Fed's rate hikes caused an initial shock that led to a slowdown in real estate markets during the latter part of 2018.
No, experts are divided; some believe more expensive money will lower housing starts and occupancy rates, while others see a closer relationship between federal rates and market activity.
Many consumers, especially Millennials, were already on the edge of affordability during low rates, so rate increases have made it harder for them to buy or retain housing in expensive markets.
The Fed controls short-term interest rates, but long-term rates are controlled by the market and have a greater influence on real estate performance over the next five years.
Activity in secondary markets may serve as a leading indicator of overall real estate trends as they reflect how different segments of the market respond to changing interest rates.
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