Interest Rates in 2022
The Federal Reserve has been closely monitoring the growth of inflation over the pandemic. In December, inflation reached a 40-year high of 7%. This certainly made the managers at the Fed to take a hard look at their policies and what they should do to fight this staggering rate of inflation. Just recently the Fed Chair declared that they are looking at increasing rates in mid to late March. Let’s take a loot at what that might mean for the Colorado Economy & Real Estate Market.
INCREASING INTEREST RATES?
If the Federal Reserve does increase interest rates, it looks like they will increase anywhere between a quarter of a percent (0.25%) up to a full percent. Why? There are several reasons why the Fed would do this. Interest rates have been low for several years now. This was done to help with the impact of COVID-19 and the systemic shutdowns that took hold all across America, and really the world. The Federal Reserve decided it would keep interest rates at their all-time low to help stimulate the economy by allowing more loans at lower rates. They also worked closely with the President and Congress to print more money as stimulus while record numbers of Americans lost their jobs due to the pandemic. After a year of this economic manipulation, inflation started to pick up. As inflation rose from 3% to 5% to 7% over last year, the Federal Reserve started to worry that their efforts to mitigate high inflation were not working; which leads us to the conversation at hand. In order to allay such drastic inflation numbers the Federal Reserve has to start accruing interest payments again, drawing money back out of the system. The hope is that as investors, buyers, and consumers begin repaying their debts at higher interest rates, inflation will subside.
EFFECTS ON COLORADO
What does this mean for Colorado? It’s hard to tell right away. The first thing higher interest rates will do is slow down loans, and not just in real estate. This slows down money lending for new businesses, car buyers, and the individual looking for a personal loan. With less money coming into people’s hands through loans, industries across the board will start to see less of a consumer base. In truth, higher interest rates from the Federal Reserve may help the supply chain issues by slowing down demand while the flow picks back up. Hopefully prices will start to stagnate in these really competitive markets: cars, computers, gaming systems, paper goods, and food.
EFFECTS ON REAL ESTATE
We will see a direct effect on the real estate markets across the country. Once the Federal Reserve announces that it will begin raising rates, mortgages will see an effect. Though the Fed sets the standard, banks always give a higher interest rate than they get. They’re a business and have to make some sort of profit, after all. With the news of higher rates, banks will start to move their interest rates up, marginally at first. We may start to see a 0.01-0.05% increase given out as soon as the announcement comes. Once the rates are increased from the Fed, banks will follow suit, increasing 0.5-2% over previous months. This all depends on what the Federal Reserve chooses to do, and we well know they like to change their mind at the last minute.
You may be thinking, “So what if mortgage interest rates and loan interest rates go up? I’m already in a mortgage and I’m not planning on refinancing.” If you’re in this situation, you’ll probably be fine. The coming changes will little affect you. That does not mean, however, you won’t notice changes coming to your neighborhood. As mortgage rates go up, fewer buyers will want to jump into the housing market. This will keep houses listed longer, possibly stalling the increase in home values, and shifting the overall real estate market from a seller’s market to a buyer’s market. If homes begin staying on MLS longer, prices may stagnate or even drop a little. We doubt prices will drop substantially, but we may see a dip of 1-2%.
On the flip side, however, fewer new builds will start and finish this year. Big businesses may find the newer interest rates unappealing, meaning fewer new homes, condos, and townhomes will be built in a constantly growing metropolitan area. As we’ve seen over the past year, competition has been fraught with low numbers of listings, driving prices up and pushing buyers to quickly commit. If higher interest rates dwindle the amount of buyers on the market, and with the potential of home prices stagnating, fewer sellers may put their homes up for sale. This could drive prices in areas even higher than we’ve seen over the last year!
It’s important to keep an eye on the Federal Reserve, especially if you’re about to make big financial decisions. Sometimes waiting can be beneficial, and sometimes acting quickly can be just as good. If you’re looking to buy a home, now is the time to do it– before interest rates increase. Get in touch with The Wise Team today if you’re looking to buy in the Longmont or Boulder areas. We’ll get you started on the process, and hopefully get you closed and ready to move before these Federal Reserve Interest Rates affect your purchasing power.