3 Ways Low Mortgage Rates Impact The Value of Your Home
The COVID-19 pandemic has had an effect on everything...
from travel to toilet paper stock at your local grocery store. However, there’s another effect you might want to keep an eye on if you’re a homeowner: Falling mortgage rates.
The Federal Reserve cut rates by half a percentage point on March 3 (to keep up with the market), then again by 1.5 percent on March 15 (in response to COVID-19). While the Fed’s rate cuts apply to what banks pay to borrow, the cuts usually translate into lower mortgage rates for bank customers. Currently, average mortgage rates are nearly a full percentage point lower than at this time last year.
What does this mean if you’re already a homeowner? The first answer is easy: If you’ve been thinking about refinancing, now’s a good time to lock in a low rate. But if you’re concerned about the value of your home (particularly if you’ve been looking to sell in the next year), the news is a little more complicated. Here’s how the latest low mortgage rates might impact home values:
The number brings out more buyers — typically.
Low mortgage rates motivate many potential homebuyers to take the leap into homeownership by making homes more affordable. When there are more buyers than there are homes, supply and demand apply and you can expect property values to increase. However, that’s the expected scenario when there are low rates without a worldwide pandemic. If COVID-19 keeps buyers at home and properties linger on the market, price cuts abound and then create a trend towards lower home values.
Low rates here means low rates elsewhere.
Interest rate changes don’t just affect mortgages, it also affects savings accounts, CDs and other investments. Lower rates of return elsewhere mean less capital that could go into purchasing real estate, a factor that puts “supply” ahead of “demand.” Ideally, though, lackluster rates of return could motivate potential buyers to put their money into real estate instead, leading to a rise in home prices (and home values).
Buyers could be waiting for even more cuts.
While no one knows the long-term effects COVID-19 will have on the economy, many anticipate another rate drop to follow. Potential buyers might take a “wait and see” approach, which leads to homes languishing on the market, price cuts and possible trends in lower home values as a result if it’s a long-term issue.
Overall, the low mortgage rates generally mean good news for sellers, but the current pandemic does add an element of uncertainty that brings caveats. While national trends are an important factor to watch, your best indicator of where your local market is going is by keeping an eye on your neighborhood — and getting in touch with a realtor who understands your local market.