Interest rates help measure the rate of return for an investor. When there is an increase in rates during periods of economic expansion, a lot of things are affected. One of them is the cost of housing, fluctuation in interest rates will affect property costs. For every 1% increase, there is a probable drop in property value by 11%.
Therefore, if interest rates continue to rise, it will greatly affect the value of properties. These are ways interest rates affect the value of senior living properties:
Investment Value
There is a relationship between the increase in interest rates and financing costs and mortgage rates. They affect the property cost and the value. However, investment values and required rates of return are mainly affected by supply and demand for capital and competing investments.
There are many ways to stimulate the economy, and some of them include monetary policy and interest rate management. However, the federal reserve board is now focused on the latter which eventually has affected investments value. Eventually, it will affect properties of aging adults who will be putting their property up for sale.
Inflation
When inflation happens, money loses purchasing power. For instance, if something costs $50 two years ago, inflation can increase the cost to $55. Inflation also has a significant impact on the value of properties in many ways. Same way inflation can cause the price of goods to increase so also it can cause the price of properties to rise.
However, the federal reserve board is doing a lot of things to control inflation and keep it at a low rate. One of the main precautions against a frequent rise in inflation is to reduce the money supply by increasing the federal funds rate. This action keeps inflation in check, however, increases the mortgage rates. Eventually, increased mortgage rates will reduce price and demand for aging adults’ homes.
Housing Supply
The value of a property can be affected by different factors. One of the ways to increase the supply of housing is through new construction. However, factors like rising labor and an increase in the cost of materials can slow down new construction. Other factors that can slow down construction are rising interest rates and a decrease in home prices which eventually reduce the supply of housing.
This is the right situation to sell your house and move to retirement communities to access amenities, activities and other services. This is because the price will be relatively high at this time.
Economics of a Transaction
Increased interest rates will affect the economics of a transaction and will further lead to investors reconsidering some deals and opportunities. The higher interest rates might not affect expansion and renovation. However, an increase in interest rates will increase the cost of developing housing properties for aging adults.
Impact on Mortgage Rates
As mentioned earlier, an increase in interest rates can lead to an increase in mortgage rates. This is mostly for new buyers, if mortgage rate is fixed, the rate does not increase. Generally, higher interest rates and higher mortgage rates will reduce the price of aging adults’ properties.
Therefore, when aging adults start considering retirement communities and want to sell their properties, higher interest rates will make buying difficult. Or it will force the aging adult to settle below the asking price.
