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Why Higher Interest Rates Are Good

After last November’s presidential election, rates shot up 3/8 to 1/2 percent and the real estate market seemed to come to a standstill. It scared everyone into thinking that higher rates would severely impact the real estate market overall. But, it was really just “uncertainty” that kept everyone on the sidelines, and not the higher rates.

With our current economy showing continued signs of improvement, and with inflation in check, it seems likely that rates will continue to rise. And that is largely a good thing.

Here are few reasons why:

1. Slowly climbing rates often push would-be home-buyers off the fence. Yes, economic uncertainty keeps people from buying, but climbing rates often push people to buy sooner rather than later.

2. Higher rates give the Fed “ammo” for the next recession. One of the Fed’s most powerful recession fighting tools is lowering rates. But, if rates are already near zero, this tool is worthless. We need higher rates in the worst way to restore the power of this tool.

3. Retirees and savers get higher returns. Artificially low rates that benefit big banks and borrowers hurt savers who live off of their savings. Savers and retirees need higher rates.

4. Banks lend more money. Banks have less of an incentive to lend money when rates are too low. Higher rates result in more lending and more economic growth (and higher wages and more home-buyers).

5. Stronger dollar and continued tamed inflation. A stronger dollar makes traveling abroad cheaper, investing in the U.S. more appealing, and importing goods cheaper. Higher rates also keep inflation in check for a variety of reasons.

Higher rates hurt the many mortgage companies that rely on refinance business instead of purchases, and it hurts home-buyers to the extent that their payments will increase.

But the payment factor is often overstated too. A rate increase of 1/2 percent might push a payment up about $150 for a $500,000 loan. That is real money but it won’t break the bank for most of our borrowers whose income is well into the six-figure range.

Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646