The Federal Reserve And The Housing Market
July 15, 2022
In a mighty effort to control runaway inflation, the Federal Reserve has implemented an incremental increase in interest rates. As of May 2022, the US inflation rate stands at 8.6% which is the highest in thirty years. Everything in the market seems out of control and consumers are bracing for potential uncertainties.
Generally speaking, the imposition of higher interest rates is meant to control extreme consumer spending in an economy. To put it at a manageable level that would balance the supply and demand of resources by understanding how will the interest rates impact home-buying decisions. Real estate companies may have an opportunity to make a profit in a volatile market.
How Interest Rates Influence Mortgages
The real estate market’s combined contribution to the GDP of the United States in 2020 is 17.5% which amounts to $3.66 trillion. The real estate market is one of the most critical sectors that drive economic growth. The mortgage interest rate often dictates the supply and demand for loanable funds related to purchasing a property.
Roughly 70% of the properties acquired by buyers are paid through mortgages. When the federal reserve increases the the federal fund rate, the amount of the interest on mortgages increases. Wherein various financing institutions offering mortgage services will therefore offset the increase to their customers by increasing their interest rates on any loanable amount.
Rising Interest Rates Impact On Home-buying Decisions
As previously discussed, the imposition of higher interest rates by the Federal Reserve will cool down the inflation and in turn lower the demand for property. We will tackle the impact of interest rates in three points.
The impact on buyers homebuying decisions is heavily influenced by rising mortgage rates. Homebuyers would be hesistant to purchase new property because of the hefty amount that will cost them to finance their mortgages. The impact on property value will fall, as a result of the interest rates falling, property value tends to increase because of higher demand as dictated by the law of supply and demand.
Furthermore, the shortfall on demand in housing would make it challenging for realtors, real estate brokers and agents to look for prospective buyers.
The Bottom Line
Whether we like it or not, inflation and interest rates goes hand in hand into a cyclical process of preventing hyperinflation and deflation in our economy. Ultimately, high interest rates affect every sector of the economy. With all the buzz about the housing market, a cool down is a welcomed development. Averting another housing bubble is way better than having it crash again. This would save numerous businesses from closing, not to mention saving countless jobs. Eventually, the housing market will maintain a sustainable level of growth and demand to make it a safe investment for everyone again.