How Will the Housing Market be Affected by Rising Federal Reserve Interest Rates?

Experts Weigh In on the Impact of Another Expected Interest Rate Hike

May 3, 2023 - 14:09
May 3, 2023 - 14:12
How Will the Housing Market be Affected by Rising Federal Reserve Interest Rates?
Federal Reserve Interest Rates Hike | Image Credit: aljazeera

The Federal Reserve is expected to raise interest rates again, and many people are wondering how this will impact the housing market. Despite a previous increase more than a year ago, mortgage rates have more than doubled. Although the expectation was that higher mortgage rates would help bring down housing prices, this hasn't happened yet. Instead, the rate hikes have caused homebuyers and sellers to sit on the sidelines, contributing to high home prices and a lack of inventory. Experts weigh in on what another expected interest rate hike could mean for the housing market.

Another Interest Rate Hike Expected Despite High Mortgage Rates

The Federal Reserve is expected to raise the Federal Funds Rate target by another quarter point on Wednesday, according to Taylor Marr, Redfin Deputy Chief Economist. Despite the fact that mortgage rates have more than doubled since the last interest rate hike more than a year ago, experts say the Fed is still likely to raise interest rates again. However, this week's hike is expected, and it should not impact mortgage rates.

Impact on Housing Market: More Dampening or Boosting?

The impact on mortgage rates will ultimately determine whether the housing market gets a boost or is further dampened, according to Marr. If the Fed hints strongly that another rate hike is likely, mortgage rates may not drop much. However, if there is confirmation of a pause, it could put downward pressure on long-term bond yields, and homebuyers could see some mortgage rate relief.

Lawrence Yun, Chief Economist at the National Association of Realtors, believes that mortgage rates will fall in the second half of the year, which could boost homebuying. He explains that mortgage rates are likely to descend lower later in the year as the consumer price inflation calms down and changes the thinking of the Fed from tightening to possibly loosening the monetary policy.

Consumer Confidence a Key Driver for Housing Market in the Second Half of the Year

Despite the cost of borrowing, consumer confidence levels could be the key driver for how the housing market will fare, according to Lisa Sturtevant, Chief Economist at Bright MLS. Consumer confidence in the U.S. economy fell in April, according to the latest report from the Conference Board. While consumers' assessment of the current business environment improved somewhat in April, their expectations fell and remain below the level that often signals a recession looming in the short term.

Sturtevant believes that consumer confidence, which dipped to a nine-month low last month, could be the most important metric to watch. How people are feeling about economic uncertainties could be the key driver of what the housing market looks like in the second half of the year. An economic downturn later this year, even a mild one, could send mortgage rates a little lower in the second half of the year.

Although the expectation that higher mortgage rates would decrease soaring housing prices hasn't been fully realized, the rate hikes have resulted in both home buyers and home sellers taking a wait-and-see approach.

Read Also: Investing in Real Estate for Passive Income: A Complete Beginner's Guide for 2023

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