What Do Higher Interest Rates Mean for Home Prices?

  • Ahead of the Federal Reserve’s 75 basis-point hike, many investors have had their eyes on the housing market.
  • Many are holding out hope higher interest rates may ease home price growth, which has been on a red-hot tear this year, even despite high mortgage rates.
  • Home prices are currently at their highest levels ever as a result of rampant inflation and low supply.
What do higher interest rates mean for home prices - What Do Higher Interest Rates Mean for Home Prices?

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What do higher interest rates mean for home prices? Ahead of the Federal Reserve’s interest rate hike today, many investors have been considering the broad implications higher rates might have on the housing market.

As the stock market tumbled amidst rapidly rising inflation, housing prices have remained stubbornly elevated. Even following the Fed’s first two 50 basis-point hikes earlier this year, the U.S. National Home Price Index shows that from just January to March of this year, the index jumped more than 4%. In fact, home prices jumped nearly 20% between February 2021 and February 2022. As it stands, housing prices are trending at their highest level ever, dwarfing the infamous 2006-2007 bubble.

Housing has remained red-hot in one of the coldest years in recent memory. Today’s Fed meeting may change everything, however.

Last Friday’s Consumer Price Index (CPI) report was a sober wakeup call to anyone even mildly concerned over inflation. Prices in May jumped 8.6% from last year, even increasing 1% month-to-month.

As a result, most analyst predicted the central bank would levy its highest interest rate hike in 28 years.

And it has.

Today, the Fed announced its plan to raise rates by 75 basis points. It’s an unprecedented move, especially given Fed Chair Jerome Powell’s dismissal of such a hefty hike just this past May.

A hike of this stature could have broad and impactful effects on the housing market, even despite its relative resistance to market forces this year.

What Do Higher Interest Rates Mean for Home Prices?

Interest rates have intrinsic ties to the value of homes. And so this 75 basis point hike could lead to an easing in housing price growth.

Mortgage demand is currently less than half of what is was at the same time last year. Reasonably so, 30-year fixed mortgage rates are at their highest level since 2008, currently trending around 6.28%. That’s up nearly an entire percentage point from the 5.3% figure last month. In fact, Mortgage rates have climbed 3.2% over the past year, marking the largest year-over-year (YOY) rise since 1981.

Higher mortgage rates translate into fewer qualified mortgage applicants, of which there are already far less than in recent years.

Impending interest rate hikes however, may result in even less mortgage demand, putting downward pressure on housing price growth.

Craig Lazzara, Managing Director at S&P DJI, spoke to CNBC on the effect rising interest rates may have on housing prices.

Mortgages are becoming more expensive as the Federal Reserve has begun to ratchet up interest rates, suggesting that the macroeconomic environment may not support extraordinary home price growth for much longer. Although one can safely predict that price gains will begin to decelerate, the timing of the deceleration is a more difficult call…

With whispers of recession across the market, housing remains a point of contention. Lower demand for housing should theoretically lower prices, but given the general housing shortage in the country, many economists find it difficult to imagine home prices falling in the absence of a greater economic pullback.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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