How Higher Interest Rates Affect Your Investments

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Interest rates are determined by the Federal Reserve Board for the United States (also called the “Fed”). The rates are enforced through monetary policy. The implications of the raising and lowering of interest rates can have a direct and indirect effect on investors; particularly investors in the housing and stock markets. Whether you are investing in stocks on the NYSE or real estate in Houston, the interest rates play a factor.  Let’s take a closer look at how investments are affected by the increase in interest rates.

The Rate Hike Psychology

The first inclination that many people have towards rate increases is that it is a negative way to enforce unnecessary fees on borrowers. In actuality, the rise in interest rates is, in fact, a protective measure taken by the Fed. Rate increases intend to affect consumer demand on goods and services.  

On the other hand, when rates are lowered by the Fed, the intention is to entice investment spending and direct the economy away from a recession. This would help by proxy mean that the increased rates would denote that the Fed intends to slow down the borrowing by raising borrowing costs.

Stock Market Reaction

In the Fall of 2016 when Fed Chair, Janet Yellen merely announced that financial growth was enough to consider increasing interest rates, stock market experts began to immediately clamor about the potential adverse effect of interest rates on the Market. This was mostly because the seven-year bullish market that preceded it was credited to the historically low interest rates. The risk dynamic is one of the most significant factors in this scenario. When rates decrease, investors are more willing to take on risk.

The Housing Market Effect

The effect of increased interest rates on the real estate market is also connected to the risk factor. When interest rates rise, banks tend to issue fewer loans to consumers. This also includes capital that lenders loan to real estate investors. This is pretty much where the effect is felt in the real estate industry.

If you currently own property as an investment, there isn’t really any direct effect on the value of your property by the increase in the national mortgage interest rate. While property values and appraisals are not based on interest rates, the amount that a retail purchaser (future homeowner) will be approved for and willing to risk will reflect the increase in the interest rates.  

It is important to note, however, that when the interest rates are down, the cost of real estate tends to increase. This is primarily due to growing scarcity in the market. This is a stark contrast to the decline in lending seen from the increase in interest rates. With all of this being said, only time will determine what if any effect any increase in interest rates will have on houses for sale in Houston.

Conclusion

While borrowers are affected by the increase in interest rates, the Fed enacts monetary policy to increase prices as a necessary evil to control the demand for goods and services. The effect of an increase on any currently owned real estate investments is minimal at best.