How Interest Rates Can Affect Real Estate Value

Consecutive piles of pennies, increasing in size, represent interest rates increasing

Two of the biggest business news stories in recent months have involved increasing inflation and the rising cost of real estate. What hasn’t been made as clear in this reporting is that a potential solution to the first issue could actually affect the second. This is to say, a change in interest rates could influence real estate market valuation. Here’s how:

Interest Rate Hike

The Federal Reserve raised interest rates by a significant amount back in early May and seems poised to do so yet again in the coming weeks. This isn’t just some ordinary hike either: the increase of half a percentage point is the largest one in more than two decades. They may increase them by the same amount as soon as this week and that won’t necessarily be the last hike of the year.

Interest rates, in this sense, refers to banks lending other banks reserve balances on an overnight basis. Essentially, the Federal Reserve is increasing the interest rates on these loans. This measure, intended to fight inflation, has a cascading effect on the economy, including the area of real estate.

Mortgages

When interest rates increase, mortgage loan costs also increase. This makes it more expensive to buy a home, which will scare some people out of the process entirely. With fewer potential buyers, the power dynamic shifts. Sellers now have a smaller pool of potential buyers and thus are not able to charge as much for their home, further driving costs down.

Commercial Real Estate

The same premise that applies for buying homes is also true on the commercial real estate side. Essentially, interest rates increasing makes borrowing more expensive, which in turn makes whatever commercial endeavor you’re involved in less profitable. A potential buyer, then, would be looking to pay a lower price on the commercial property in order to remain as profitable as possible. This causes the value of real estate to fall as buyers are not as interested in paying higher prices.

With inflation and subsequent interest rate increases, there’s a chance your property’s value has shifted at some point recently. If you need a professional appraisal on your residential or commercial property, Atlas Valuation can help. Our experts specialize in everything from legal disputes to purchase negotiations to estate closure and more. Call 334-737-6993 to get started today.

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