Friday, July 14, 2006

MIAMI-With the Federal Reserve raising interest rates for the 17th time in a row on June 29, many in the real estate are questioning how the rate change will impact the real estate market.

In a statement regarding the rate hike, the Federal Reserve said “recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling on the housing market and the lagged effects of increases in interest rates and energy prices.”
Among those questioning the future of the real estate market is John Burford, senior vice president and chief economist with the International Bank of Miami. With the central bank raising its lending rate another 25 basis points to 5.25%, Burford sees a rise in both short- and long-term interest rates and a dampening of the real estate market. “Increasing interest rates increases the cost of obtaining financing for both commercial and residential real estate,” he says. “This makes it more difficult for people to buy property at higher prices.”

Burford says the Federal Reserve’s actions, however, are a deliberate attempt to slow the demand for real estate, put a damper of escalating prices and keep a lid of inflation. Thus far, buyers have been able to afford the rising prices in the real estate market because unemployment levels have been low and wages have increased. In Florida, the higher interest rate environment is offset somewhat by the types of buyers attracted to the area. Many hail from the Northeast or other parts of the world where real estate is more expensive and Florida is a relative bargain, he adds.

Burford says the Federal Reserve will pay close attention in future months to economic indicators, such as automobile and housing sales, as it considers whether to raise interest rates again. With signs that unemployment will remain low and wages will rise, Burford anticipates the Fed may raise the rates a few times more before it possibly lowers the rate. “The important thing to note is that rising interest rates reflect a growing economy. Falling interest rates reflect a slowing economy,” he says.

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