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Price Plunge Alert! How Federal Funds Interest Rate Changes Could Impact Your Michigan Home Value

Game over for homeowners and home buyers when interest rates climb too quickly.
Interest Rates Going Up Too Fast Could Be GAME OVER

We have seen the FED raise rates at the fastest pace in history over the last 18 months. There has been a lot of noise debating whether this will cause a crash in prices in 2023 or 2024. In this blog post, we will explore the impact of federal funds rate increases and decreases on Michigan's real estate prices and explain what happens when they do. After reading you will be informed so you can make the best decision on buying a home, selling a home, or investing. The real estate market is sensitive to various economic factors but interest rates are one of the most important factors. So lets dive in!

Rate Increases: When the Federal Reserve raises the federal funds rate they want to slow things down! It affects borrowing costs for banks, which, in turn, influences mortgage rates. Here's how rate increases can impact Michigan's real estate market:

A small child pointing up while interest rates are increased.
Rates going up!

  • Increased Mortgage Costs: As interest rates rise, borrowing becomes more expensive for potential homebuyers. Higher mortgage rates mean higher monthly payments, which can reduce affordability for buyers. This can lead to a decrease in demand for homes and potentially put downward pressure on real estate prices. This also affects people with adjustable rate mortgages (ARM's), when their mortgages reset after 5-7 years the new interest rate will increase their payment.

  • Slowed Housing Market: When mortgage rates increase, it can discourage potential buyers from entering the market or delay their purchase decisions. This slowdown in demand can lead to longer listing times and increased inventory levels. Sellers may need to adjust their pricing expectations to attract buyers, resulting in a potential softening of real estate prices. We are seeing this all over America right now.

  • Investment Alternatives: When interest rates rise, it can make alternative investments, such as bonds or savings accounts, more attractive. This diversion of funds from the real estate market can reduce demand and potentially impact property prices. This past year we have seen the highest inflows in decades to government bonds that are yielding as much as 5%. This takes money away from peoples pockets to buy things like homes, cars, and cryptocurrency and slows things down.

All of these things the FED is trying to do on purpose because of the high inflation numbers that have been posted since 2021. They feel the only way to stop the inflation is crush your ability to afford a home.

Rate Decreases: Conversely, when the Federal Reserve lowers the federal funds rate it is like adding fuel to the fire. Here are the following effects on Michigan's real estate market:

Happy child as arrow points down representing interest rates going down.
Rates Going Down!

  • Increased Affordability: Lower interest rates translate into lower borrowing costs for homebuyers. This increased affordability can spur demand, making it easier for prospective buyers to enter the market. The heightened demand can drive competition among buyers, potentially leading to an increase in real estate prices.

  • Refinancing Activity: When rates decrease, homeowners often take advantage of refinancing opportunities to secure lower mortgage payments. This can free up disposable income, enabling homeowners to invest in home improvements or consider purchasing more expensive properties. Increased refinancing activity can also stimulate the real estate market by boosting demand and supporting property values.

  • Investor Interest: Lower interest rates can make real estate investments more appealing to investors seeking higher returns than those offered by other assets. Increased investor interest can fuel demand in the market, potentially resulting in upward pressure on real estate prices.

The FED did this in 2020 in response to the pandemic. They lowered rates all the way to 0 and this overreaction is why we are seeing so much inflation and why housing prices pushed up so fast in 2021. Rocket fuel for Michigan housing!

Rocket going up fast representing the Michigan housing market in 2021
Michigan Housing Market in 2021

Well there you have it. Interest Rate Changes Impact Your Michigan Home Values. The federal funds rate set by the Federal Reserve plays a crucial role in shaping Michigan's real estate market. Rate increases can dampen demand, slow down the housing market, and potentially lead to a softening of real estate prices. On the other hand, rate decreases can boost affordability, stimulate demand, and potentially drive up property values. However, it is important to note that various factors beyond interest rates also influence real estate prices, such as local economic conditions, employment trends, and housing supply and demand dynamics.

As a prospective buyer, seller, or investor in Michigan's real estate market, it is essential to monitor both national and local economic indicators to gain a comprehensive understanding of the market's current and future prospects.

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