Interest Rates and Housing

R47A - Syndicate 6
Habibie Vakunala R A Zara Zentira Shella Deviany Hakim Tegar Ditya Pragama Hersa Audi Pratama Inayah 291 12 005 291 12 016 291 12 043 291 12 049 291 12 079 291 12 082

Case Background

Average apartment prices in Manhattan were down Number of days it takes to sell an apartment increasing Housing stock is also staying on the market longer The decline followed a drop in overall demand

Interest Rate
Interest rates are the rates at which money can be borrowed for a set period of time. The higher the rate, the more money a borrower must pay in the form of interest on the loan. The U.S. Federal Reserve sets a rate at which it lends money to banks and other financial institutions, which in turn affects the rate at which they lend to businesses and individuals, such as people seeking a mortgage. Interest rates in the United States are determined by a number of factors, including 1) the actions of the U.S. Federal Reserve, 2) the health of the economy and 3) the rate at which people are saving money.

One part of investment spending that is quite sensitive to interest rates is investment in housing. Home purchases are generally financed with a mortgage, a longterm loan.

Housing-Interest Rate See-Saw

When the interest rate is higher, borrowing becomes more expensive and slows. When the interest rate is lower, people are more likely to borrow money, as doing so will cost them less than at another time more willing to take out a mortgage than when rates are higher.

Effects
Mortgage rates are lower The purchasing of a home more affordable The sales of homes rise as more consumers are able to take out a low-cost loan Consumers with existing mortgages : refinance their mortgage (trade their current loan for another, cheaper one)

In periods of low interest rates, more houses are often built as demand rises, and development companies are able to borrow money at a cheaper rate to finance the construction.

Considerations
Although the cost of mortgages is closely tied to the interest rate, the price at which homes are sold does not always appear in direct correlation. While low interest rates can raise demand for houses, pushing up the prices of houses, if the price gets too high, demand can cool, causing house prices to plummet.

Adjustable-rate mortgage

Not all mortgage rates are fixed at the time that the loan is taken out. With an adjustable-rate mortgage, the interest rate of the loan varies with prevailing interest rates and may change as often as every month. Most adjustable-rate mortgages have their rates tied to an index of financial securities, one that changes with the movement of the market. During the financial crisis of 2008, many homeowners faced foreclosure as the rates on their mortgages rose unexpectedly and they could not make their payments. To reduce interest rate risk:
The borrower benefits if the interest rate falls (but loses if the interest rate increases). The borrower benefits from reduced margins to the underlying cost of borrowing compared to fixed or capped rate mortgages.