Housing market will slow further after Fed’s rate hike

Home sales expected to slow as buyer demand erodes

In an effort to tamp down inflation, the Federal Reserve Open Markets Committee on Wednesday hiked interest rates 75 basis points, the largest increase since 1994. The move is expected to chill a housing market that was already beginning to lose steam in recent months.

“Overall economic activity appears to have picked up after edging down in the first quarter,” the Fed said in a statement Wednesday afternoon. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures.”

The Fed also announced several more rounds of rate hikes over the next year, though it cautioned that its moves to rein in inflation would likely weaken the economy and the Fed may have to reverse course in 2024.

“So far, the short-term fed funds rate that the Fed directly controls has risen by 175 basis points. But the 30-year fixed rate mortgage has risen even more – by nearly 300 basis points. On the same $300,000 mortgage, the monthly payment has risen from $1265 in December to $1800 today,” said Lawrence Yun, chief economist for the National Association of Realtors. “That’s painful and, consequently, will shrink the buyer pool. Home sales have recently been trending down towards 2019 figures. Sales could fall even further with some inventory sitting on the market for more than a month like in the pre-pandemic days.”

The rapid rise of mortgage rates — now north of 6%, compared to about 3% in January — will trigger weakened demand, which will result in a slowdown in home price increases.

In interviews with RealTrends this week, agents said the market turmoil has put some deals at risk, and also created opportunities for buyers who previously had significant competition for a low number of homes in a scorching-hot housing market.

“People are more hesitant,” Austin, Texas-based Bramlett Residential Real Estate agent Jeremy Vandermause told RealTrends’ Brooklee Han. “They lost buying power. I have a client right now whose price range was $400,000 to $420,000 and now it is more in the $360,000 to $390,000 range because her original budget was when interest rates were at 3% or 4%.”