Why higher interest rates are good

This may surprise you, but higher interest rates aren’t always bad! In fact, sometimes they can be really good for the real estate market. Jay Vorhees at JVM Lending gives us some good reasons why. I’ve summarized those points below with commentary.

After the most recent presidential election, interest rates went up 3/8-1/2%, and the real estate market seemed to come to a standstill. It scared everyone into thinking that higher rates would severely impact the market overall. But, it was really just “uncertainty” that kept everyone on the sidelines, and not the higher rates.

Rates might continue to rise, but that’s a good thing, and here’s why:

  1. Slowly climbing rates often push would-be home-buyers off the fence. Higher interest rates heat up the market by pushing 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 low, that tool becomes worthless. To restore the power of this, we need higher rates.
  3. Retirees and savers get higher returns. Artificially low rates that benefit big banks and borrowers hurt savers who live off of their savings. The higher the rates, the better for retirees and savers.
  4. Banks lend more money with high interest rates. There is a much better incentive to lend when rates are higher. More economic growth, higher wages and more home-buyers result from higher rates, too.
  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 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. A rate increase of 1/2% 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.

What are your thoughts and how would higher rates affect you directly?