Interest Rates Explained

As long as there has been business, there have been interest rates.   Without interest rates, lenders would have no incentive to lend.   The money the lender realizes from the interest he charges is his compensation for the risk he takes in making the loan.

As relates to real estate in Lexington Kentucky and everywhere else, interest rates play a critical role.  It seems to be true that as long as rates remain in the single digits, buyers are not uncomfortable.    When rates climb past 10%, folks begin to think twice about buying.  In the 70’s when rates were 18%-20%, people were still buying homes but they were using very creative financing to do so.    Savvy investors who bought Lexington homes in that period likely paid less even though the rates were high, but they were smart enough to refinance to a more attractive interest rate in a couple of years when rates went down again.

As is common in all locations, the market for Lexington Kentucky real estate is dependent on the overall health of the American economy.    Lexington real estate does much better when interest rates are low and there are plenty of homes for sale in Lexington.   Current interest rates are low and going lower.   The government is considering lowering the mortgage rate for new homeowners from 5.5% to 4.5% - a 45 year low.  This news has spurred mortgage applications up by over a third.   A 4.5% mortgage rate would prompt many people to buy, even if they fear home prices will continue to fall and the economy to weaken. Rates have not fallen below 5.37% for 45 years.  Nationally, lowering rates to 4.5% would spur 500,000 home sales over the next year. That would put a big dent in the supply of 4.6 million homes on the market. Right now, there is a 10-month supply of homes for sale, three to four months more than in normal conditions.

What is the significance of this in the current U.S. economy as well as in Lexington Kentucky real estate?

Federal officials acknowledge the economy won't recover until the tidal wave of foreclosures ends. Federal Reserve Chairman Ben Bernanke said the government must do more to help struggling homeowners, possibly by buying delinquent mortgages and refinancing them to more affordable terms.

For buyers of homes for sale in Lexington, the good news is that you can now purchase a home that you probably could not have afforded last year – and at an interest rate much lower than you would have paid last year.   There is a lot of pent up demand for Lexington real estate, and as soon as the interest rates are lowered, there may be something of a boom in Lexington real estate.  It may be good advice for buyers to purchase now while they can negotiate from a position of strength.  As soon as the market turns around, homes for sale in Lexington will begin moving very quickly indeed. And buyers will no longer have an advantage.