Inflation in the U.S. is higher now than it has been in 40 years with little indication of letting up, which is why the Federal Reserve made the decision to raise its benchmark interest rate in mid-March. How does that impact the economy, and, specifically, the real estate market?
“The Fed uses interest rates as either a gas pedal or a brake on the economy when needed,” says Greg McBride, chief financial analyst at Bankrate. “With inflation running high, they can raise interest rates and use that to pump the brakes on the economy in an effort to get inflation under control.”
That’s the key reason the Fed increased its benchmark interest rate a quarter of a percent. This essentially makes it more expensive for people to borrow money. The intended effect is that consumers will then choose to stop making purchases, thereby lowering demand and reigning in prices which would reduce inflation.
It was the Fed’s first increase since 2018, and more increases are expected throughout 2022. While the interest rate adjustments don’t directly impact mortgage rates and the housing market, the decisions made by the Fed do impact the direction of the real estate industry. Here’s what home buyers, sellers, and Realtors can expect this year.
Mortgage Rate Increases Will Dampen Demand and Competition
Concurrent with the interest rate, experts expect mortgage rates to increase throughout the year. This will likely bring down the demand for houses as it will increase the cost of borrowing money to purchase a home. This will, in turn, alleviate some of the pressure on homebuyers who have faced intense bidding wars over the last year in an extremely tight housing market. Sellers will also get a little more breathing room for negotiations as there will be fewer multi-offer days with less shoppers in the market.
Home Price Appreciation Will Slow Down
The price of houses isn’t expected to fall this year, but industry professionals do expect the appreciation of home prices to level out a bit after they skyrocketed in 2021 on the heels of soaring demand. The National Association of Realtors predicts home prices to climb by 5.7 percent this year after the nearly 18 percent increase they hit last year. For sellers, this means they need to be more cautious about pricing their real estate as sales of overpriced homes are likely to dip.
It’s impossible to predict exactly how the Fed’s interest rate hike(s) will impact the housing market, but industry professionals still expect it to be a seller’s market in 2022 due to low inventory and high demand. However, with demand slowing and competition waning, buyers may be in a better negotiating position than they were in 2021. It all comes down to how risky sellers are willing to be with their prices and how risky buyers are willing to be with their budgets.