As many of you may know, interest rates play an extremely important role in the real estate market.
It determines what your mortgage payments is going to be for the next several years at least. And because of this idea, many believe housing markets have an inverse relationship with interest rates.
I have pointed out before, however, that interest rate and housing prices may not always have that inverse casual relationship. Nevertheless, since the threat of the end of QE began last year, the rise in mortgage rates did seem to have a detrimental effect to the buyers market.
Will Interest Rates Rise in 2015?
With that being said, should we be expecting a rise in interest rates in 2015? Will that continue to wreck havoc to the housing market in the US? How should you react?
The truth is, I myself have difficulties in forecasting what the rate can be in 2015. What the Federal Reserve had shown us in the past few years is that they are often unpredictable and provide unreliable forecasts. Quantitative Easing should have ended a long time ago but they continued to adjust employment rate standards and inflation rate demands that we have no idea when QE will surely end.
So How Should One Prepare for the Upcoming Year?
It really depends on your situation.
If you are a first time homebuyer, I’d suggest to try to get your house in 2014 while the rates are still relatively low compared to historical standards. After all, the chances of mortgage rates going down is far less likely than rates going up.
If you are already invested in real estate, this becomes a little more tricky. I wouldn’t suggest liquidating your real estate portfolio because you are expecting a possible depressed market if and when the Feds will raise the rates.
Although you may be able to sell at the top to buy the bottom, the transaction costs associated with liquidating and acquiring real estate can be pretty steep (unless you were selling at 2006 to buy at 2010-11). I don’t think the gap will be that wide.
Related: Where is the Housing Market Headed?
I do think, however, it may be wise to refinance (if you haven’t in 2012) your real estate to pull out equity. You should use this equity to invest in real estate if there is a collapse. So if you were to have a HELOC, this would work best. After all, a HELOC won’t cost you much unless you deploy it, even though some HELOC’s costs are based on an index rate.
If you are an all cash investor, then it is perhaps wise to sit out and wait for a dip in the real estate market. Perhaps it is worth waiting to see what the rates are in 2015 and how that would affect the market you are investing in. Holding your cash for an extra several months can cost you some in opportunity cost, but not much.
So say, if the rates don’t go up 2015, we would have been likely to be seeing an economy that hasn’t quite picked up yet. If the economy is not heating up as much, it is very difficult for the Federal Reserve to raise interest rates. Nevertheless, it is important to note that in today’s low interest, yield driven environment, a lot of investments could collapse once rates do go up.
As we have witnessed before, the Fed has some uncanny ability to create and deflate bubbles. There may be opportunities elsewhere besides real estate that can be ripe for picking (stocks, for example). It is not a bad idea to invest in those distressed areas to earn some capital before going back to real estate.
What do you think will happen with interest rates in 2015?
Be sure to leave your comments below!