What Happens When Interest Rates Go Up?
They say that a healthy economy has interest rates between 6-7%. I don't know who 'they' are and I don't know why they use that range. What I do know is that we are very much under that 6-7% range and those rates will have to come up at some point. Because we are nearing a top in the market, I would suspect they come up sooner than later. The question is, what happens when those rates go up? When there are rate hikes, it effectively makes money more expensive for the end consumer. When banks are lending they have to make a spread so it causes the borrower to pay a higher price. What this means is that let's say $1000 per month today can get you a $200,000 mortgage in that 3-4% interest range. (Rough numbers). Then if rates go up to 6-7%, that $1000 per month might only allow for a $150,000 mortgage. This effectively reduces the amount of people in the market that can borrow to buy. The balancing act for the Fed will be to prevent the economy from coming to a freeze where they can't lend out money because people can't afford it.
Ian Walsh215.839.3271
Comments