Judging by the health of the prominent economic indicators, the US economy seems to be on an upswing. GDP, the most crucial indicator, is expected to rise to 2.8% and 2.4% in 2018 and 2019 respectively that bores well for the nation’s economic health, on the whole. However, the man (or woman for that matter) on the street, would be more interested in keeping an eye on the prevailing interest rates.
Plummeting interest rates imply that those looking to buy a home or chunk of real estate will have to pay less interest on loans and mortgages. However, one will be forking out a higher amount as loan reimbursement when there’s an upsurge in interest rates. The fed funds rate (comprises short-term interest rates) was increased to 2% in June by the Federal Open Market Committee, and forecasts suggest that this rate will further go up 2.4%, 2.9%, and 3.4% in 2018, 2019, and 2020 respectively.
The Impact of Escalating Interest Rates on Real Estate Investments
Interest rates critically impact the current valuation on the cash inflows in the future. The Federal Reserve was compelled to downscale treasuries to the tune of $4 trillion in the wake of the financial crisis in 2008, an unprecedented move by all accounts. So, if you’re contemplating dipping into your IRA reserves for buying a piece of real estate, you’ll first need to consider whether an improving economy will, more than offset the adverse effects of mounting interest rates.
What causes the rates to go up?
The interest rates are chiefly affected by four significant factors, namely Federal Reserve, bond demand, bond supply, and inflationary trends. Interestingly enough, increments in demand or supply of bonds cause a spike in the interest rates. Increasing inflation also push up the rates as consumers fear they’ll have to pay more to purchase.
Federal Reserve tries to control the effects these indicators or drivers have on the interest rates by purchasing or offloading assets as and when required. Despite the best intentions of the Feds (to contain the rates), the preventive or correcting measures taken by the agency could also make the inflation go northwards.
Significance of the Rising Interest Rates to Real Estate Investors at Present
The Feds buying up assets worth more than $ 3 trillion has had a soothing effect on inflation-it has stayed put. The static rate of inflation has discouraged banks and financial institutions from lending that has resulted in poor circulation of money. However, expectations of the economy recovering might cause the banks to up their lending interest rates which will ultimately push up inflation.
The interest rates will also receive a boost as Feds goes slow with purchasing of assets. Investing in real estate in the present scenario offers a higher degree of protection to your investments (and hence better ROI) compared to other types of fixed-return investments like bond funds, CDs, and ETFs.
So, the real estate sector holds a lot of promise for investors throughout the US. Towards this end, residents of Indiana will be reaping monetary gains by investing in Indianapolis real estate.