When interest rates increase, homes cost more, and logically, less people want to buy them. This forces housing costs to come down as a result. The current housing market, however, is a little different; there has been an increase in housing expenses for the reasons listed below. The Covid-19 pandemic has had an influence on foreclosures; Millennials are mature and able to purchase homes; and There are fewer single-family homes now than there used to be due to labour constraints and supply chain issues. The Federal Reserve uses their funds rate as a tool to manage the economy. When the economy is not doing well the rate is lowered to stimulate growth like we saw after the Great Recession, and at the beginning of the COVID-19 pandemic. The downside to this is inflation. In order to deal with inflation the Fed then raised the rate which makes businesses and individuals less likely to borrow money for big purchases.
Economic Effects of Rising Interest Rates
• Higher cost of borrowing – When interest rates go up, credit card and loan payments become more expensive. This situation will discourage people from borrowing money and they'll reduce their spending. These costly monthly repayments also mean less disposable income for those who have existing loans. They'll cut their expenses on other consumables.
• People save money rather than spend it – While it costs more to borrow, higher interest rates also mean that deposit accounts offer attractive returns. It'll be better to keep cash in the bank than use it on purchases.
• The value of a currency rises – Countries may attract deposits in their banks because of the higher interest. There'll be an increase in demand for the nation's currency, causing the value to rise. Exports become more expensive, which will affect the revenue for the country.
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