The Impact Of The Interest Rate Hike On The Real Estate Market

The Federal Reserve announced in March 2022 that interest rates would be raised for the first time in four years. Even though the 25 basis point increase was widely anticipated, real estate investors should understand how this shift in Fed policy will affect the housing market.

In this article, we will provide a brief overview of what the Fed is doing, why they are doing it, and how it may affect real estate investors.

Understanding the rise of interest rate

Following the Federal Reserve’s March meeting, it was announced that the Fed’s target federal funds rate would be raised by 25 basis points. The target federal funds rate is the interest rate at which banks lend each other reserve balances.

The federal funds rate is one of the primary tools available to the Federal Reserve for managing the economy. It is reduced in difficult economic times to stimulate economic growth. This was evident following the Great Recession and again at the start of the COVID-19 pandemic.

There was no financial crisis in Covid. Vaccines and massive congressional spending paved the way for a quick recovery. But the Fed now faces a new challenge: rising inflation.

When you think of inflation as too much money being circulated when there aren’t enough goods to spend it on, it’s easy to understand. So, to combat inflation and reduce the money supply, the Fed raises interest rates. As interest rates rise, businesses and individuals are less likely to borrow money to make large purchases, resulting in more money sitting on the sidelines and helping to keep inflation at bay.

Today, unemployment is extremely low, but inflation is extremely high. The US economy no longer requires all of the Fed’s assistance.

Borrowing becomes more expensive every time the Fed raises interest rates. Mortgages, home equity lines of credit, credit cards, student debt, and car loans will all have higher interest rates. For large and small businesses, business loans will also become more expensive.

The most visible manifestation of this is in mortgage rates, which have already risen due to expectations of rate hikes.

Interest rates are significant in the housing market for a variety of reasons. They influence the value of the real estate by determining how much we will have to pay to borrow money to buy it. Low-interest rates tend to increase demand for real estate, driving up prices, whereas high-interest rates have the opposite effect.

Raising interest rates is a delicate balancing act. Rates must rise to combat inflation, but doing so puts the economy at risk of slowing GDP growth or even a recession. Again, the possibility of reduced borrowing and spending as interest rates rise can harm economic growth.

This is why investors should closely monitor the Fed’s actions; they want to know how the Fed will balance its dual responsibilities of combating inflation and promoting economic growth. It’s a walk on a tightrope.

Conclusion

Mortgage interest rates will rise, putting downward pressure on the housing market. Rising mortgage rates reduce affordability, which in turn reduces demand. This would have an immediate impact on prices in a more typical housing market. However, the current market is unique, and “downward pressure” on housing prices does not always imply “negative price growth.”

Remember that other forces are currently driving the housing market, many of which are pushing up prices. Demand remains high, owing to millennials reaching peak homebuying age, increased investor activity, and increased demand for second homes. Furthermore, supply remains severely constrained, and as long as this is the case, housing prices will rise.

Always keep in mind that understanding interest rates is essential for making financially sound investing decisions. The interest rate is the amount a borrower is charged for the privilege of borrowing money, and mortgage interest rates are determined by several factors, including the state of the general economy and your circumstances.