I am getting a little confuse, I am trying to clearly understand how interest rates affect market appreciation.
Any help will be highly appreciated,
Rates can affect housing market appreciation, for one, in that these historically low mortgage interest rates in the 3-4% range allow people to qualify for more house. Their monthly payment is lower due to the lower rates. More people can buy more house, so appreciation will usually follow. Mortgage rates seem to be closely tied to the ups and downs of the 10-yr treasury bill. I'm assuming you are talking about mortgage interest rates and housing market appreciation?
Welcome to BP!
Interest rates effect home prices, when rates are high, folks with so much money having to buy can't buy as much house, the interest rate is high sellers lower prices to allow those buyers to make the fixed payment required. When rates go down, people can borrow more with the same payment being made and the seller raises prices. When rates are down you can buy more house for the same payment.
When rates are down more try to borrow and buy, it becomes a seller's market raising prices. When rates are up, fewer borrow and try to buy, it becomes a buyer's market as sales slow down, homes are harder to sell.
While supply and demand try to move to a balanced market, price and supply and price and demand also move to an equilibrium any fluctuation in interest rates that hold for a significant period will then move price and the market adjusts. Any change in inventory or supply also effects price as will more demand. RE prices generally move slowly, less volatile than other markets as the factors effecting price don't move quickly as say, the stock market with news of interest rate changes.
Market expectations also apply, how people perceive the movement of prices will effect prices if expectations remain constant for a significant period of time.
Expectations may the change demand, thereby the perception of supply, rates may increase and prices may head up.
It all goes in a circles, or cyclical cycle of fluctuations where the market is always trying to adjust to equilibrium, where the market is in balance. Perfect equilibrium is not really desirable as the market also has economic factors at play, the CPI, durable goods, consumer goods, interest rates, local and national employment and other factors all contribute over time. What is strived for is continued growth of the economy that generate appreciation even while interest rates remain fairly stable.
Hope you can see through that fog. :)
Not to confuse the issue, but the opposite could occur in commercial real estate. As interest rates go up, investors in commercial will usually demand more of a return for their investment.
Therefore if when you purchased you were achieving an 8% cash flow, if interest rates climbed, an investor could expect 10% cash flow. That would reduce the overall price you could sell that investment for.
A lot of it has to do with the leases and length of your tenants, but something to consider if you're asking regarding commercial also.
Hi Steve,Bill and Louis, thank you for your help and answers. it does makes a little more sense now.
Thank you guys again, I appreciated it.
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