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Fed interest rate hike: What it means for real estate market

An interest rate hike could mean potential further slowing of buyer demand.
Fed interest rate hike: What it means for real estate market
Posted at 8:21 AM, Jul 26, 2023

After briefly pausing interest rate hikes in June, the Federal Reserve is expected to raise interest rates by a quarter of a percentage point on Wednesday, marking the 11th raise in the last 12 policy meetings.

The anticipated hike would raise the benchmark interest rate to the 5.25%-5.50% range. 

The Fed had indicated it wants to curb inflation to the 2% level, and raising interest rates would help alleviate rising prices. 

The overall economy is on a growth path, with a national unemployment rate at 3.6%. But the real estate sector is facing a shortage in inventory nationwide as sellers sit on the sidelines.

U.S. house prices rose 4.3% between the first quarters of 2022 and 2023, according to the Federal Housing Finance Agency House Price Index. 

A potential interest rate hike means potential further slowing of buyer demand, said Kelly Moye of Compass Real Estate Colorado.

“Buyers have recently become accustomed to today’s rates and have ventured back out into the real estate market. Another rate increase may slow that momentum, causing even more days on the market for the properties that are listed for sale,” Moye said. 

SEE MORE: Commercial real estate market won't recover until 2040, economist says

Moye is concerned that a rate hike may deter sellers who are motivated to sell. The inventory situation across the country hasn’t let up as potential sellers are reluctant to move to trade into a higher mortgage interest rate.

Interest rates increased significantly since last year, from around 5.7% in June of 2022 to 7.5% this June on a 30-year mortgage. That's about a $600 a month increase on a $500,000 home purchase budget with the monthly payment at $3,496 versus $2,902. 

“The Federal Reserve’s mandate is to contain inflation and help the economy," Lawrence Yun, chief economist at National Association of Realtors, said in a statement. "It misjudged the early strength of inflation, which got out of control. Now it could misjudge on the economic front. Monetary policy works with a long lag time. The Fed appears too focused on the lagging economic indicator of jobs rather than early indicators like future inflation and commercial leasing activity; they should look ahead and stop raising interest rates."

On the other hand, if talk of a rate increase continues, buyers may be more motivated to purchase now before that happens, Moye said.        

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