How do interest rates impact real estate risk?

Interest rates play a significant role in the dynamics of real estate markets. When interest rates change, they primarily affect borrowing costs, which directly influences how much individuals and investors are willing or able to spend on property. Lower interest rates typically reduce monthly mortgage payments, making it more affordable for buyers to purchase homes. This can lead to increased market demand, driving up property values. Conversely, higher interest rates increase borrowing costs, which may discourage buyers from purchasing homes, leading to decreased demand and potentially lowering property values.

Additionally, changes in interest rates can impact the overall economic environment. Higher rates might slow down economic growth, decreasing consumer confidence, which can further affect the demand for real estate. Thus, understanding how interest rates interact with both borrowing costs and market demand is crucial for assessing real estate risk. This multifaceted impact is why the correct choice highlights the dual influence of interest rates on both borrowing costs and market demand.