How Interest Rate Hike Will Affect Maryland Real Estate
Recently the Federal Reserve increased the interest rates, and this decision came as a shock to many stakeholders, many of whom are located in Ellicott City, Maryland, because interest rates have not been increased in the past 10 years. However, this move was predictable by many as the rumors were already flying around about interest rate hike, and finally the Federal Reserve announced that the interest rate would be increased by 0.25%. This change in interest rate is expected to have an impact on the economy and the overall consumer behavior.
Some analysts at investment companies have claimed that this small upward swing in the interest rate would not have any drastic impact on the consumers, but it must be noted that the short term rates come under the jurisdiction of the central bank, and any changes in them would end up affecting credit cards, savings accounts and other loans. Initially, the central bank kept these interest rates low in order to stimulate the economy by encouraging its people to spend more money and avoid savings. But now the change in rate by Federal Reserve is deemed to have an impact on certain types of loans.
Impact on Mortgages
As expected, this change in rate will have an effect on mortgages. Since the mortgage rates are usually tied with the bonds, an increase in interest rate will also push up the yields on those bonds. The rising rate will increase the borrowing cost as well for those consumers who want to purchase homes. But it entirely depends on how the central bank reacts. In 2004 when the rates increased, the central bank decreased the mortgage rates.
Effect on Consumers
This small rise in interest rate would affect those Ellicott City, Maryland consumers more who are borrowing large sums of money. So, for instance, if a consumer finances a house for 200,000 at an interest rate of 4 percent, his/her monthly payment will be around 1,000 for 30 years. Now imagine this scenario where the interest rate increases and his monthly obligation will jump by $30, which is a big amount when multiplied by 30x12 months.
This increase in interest rate has the ability to bring a mild recession in the real estate market because higher mortgage rates will impose filters among the people who qualify for loans, and this would reduce the number of buyers. This will happen because the incomes are stable, but the mortgage rates are rising and when a comparison is made between debt and income, many people would become ineligible to finance a house. Some estimates are suggesting that around 7% of the people would not be able to finance a house because of rising rates and a mismatch between debt and income. For areas like Ellicott City and Howard County Maryland, certain areas neighborhoods of Baltimore and Baltimore County, and other nationally ranked top ten areas there should not be much of a change in the real estate markets particularly due to the amount of the average disposable income of the area.