Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What influences Interest Rate Risk primarily?

1. The national unemployment rate

2. Rate of household savings and demand for housing

3. Borrower's credit score

4. Investment in real estate

The correct answer is: Rate of household savings and demand for housing

Interest rate risk is primarily influenced by the relationship between the rate of household savings and the demand for housing. When household savings rates increase, there tends to be more capital available for borrowing, potentially leading to a decrease in interest rates. Conversely, when demand for housing rises, it can increase the pressure on interest rates, as lenders may raise rates to balance demand against the available capital for loans. Understanding this dynamic is crucial because interest rates fluctuate based on various economic factors, including inflation expectations and the monetary policy set by central banks. When the economy gets stronger, leading to higher demand for housing, interest rates might rise in response to that increased demand. This interplay directly affects potential buyers' and investors' ability to finance real estate, ultimately influencing overall market conditions. In contrast, while aspects such as the national unemployment rate, a borrower's credit score, and investments in real estate are significant in their own rights, they do not directly influence interest rate risk to the same extent. The unemployment rate may reflect broader economic conditions that could indirectly affect interest rates, but it does not play a primary role in determining interest rate risk. Similarly, a borrower’s credit score is more indicative of their individual loan terms rather than a broader economic risk factor. The overall investment mood