Could Fed interest rate hikes cool the housing market?

Placeholder while loading article actions

Gary Nelson is starting to see signs that the scorching housing market is cooling in Flagstaff, Arizona, as more buyers retreat and homes take a little longer to sell.

The president of Arizona Realtors said the “double whammy” of soaring home prices and rising mortgage rates is a welcome change after two years of fierce bidding wars and monster growth.

“We’re going to be hosting a sort of activity plateau,” Nelson said. “Maybe things will slow down a bit. I hope that’s what we see.

The Federal Reserve is set to announce the biggest rate hike in more than two decades, half a percentage point, on Wednesday as it races to cut the highest inflation in 40 years and calm a housing market that has been supercharged in the age of the pandemic.

A rise in interest rates will affect anyone with a home loan, car loan, savings account or money on the stock market. (Video: Daron Taylor/The Washington Post)

The Fed’s plans to raise rates and shrink its large balance sheet have already pushed the 30-year fixed-rate mortgage up average above 5%, well above the 2.98% of a year ago. More expensive mortgages have led to some signs of a market slowdown, although the market remains generally hot.

Towards the end of April, mortgage purchase requests were down 17% from a year earlier, according to the Mortgage Bankers Association, a trade group. Sales prices have fallen in about 14% of homes in the past four weeks, compared to 11% of homes with lower sales prices in March, according to Redfin data. Wells Fargo even laid off home loan employees amid a drop in mortgage business.

Rents are rising everywhere. See how much prices are up in your area.

Existing home sales fell 2.7% in March, the second consecutive month of decline, according to the National Association of Realtors. And this change is playing out across the country. March sales fell in Midwest (4.5%), the South (3%) and the Northeast (2.9%) but remained stable in the West, according to the group.

“If I had to pick one metric as a leading indicator, it really is mortgage rates rising at their fastest rate in history,” said Taylor Marr, deputy chief economist at Redfin. “This is one of the first signs that the market is changing.”

A mortgage rate that goes from 3.5% to 5.5% can add hundreds of dollars to a monthly home payment, narrowing the choices. houses that people can afford.

Policymakers are particularly concerned about the price of housing because of its ability to spur inflation across the economy. For example, housing represents about one-third of the basket of goods and services used to measure the consumer price index. If housing prices do not slow soon, it will be more difficult for headline inflation to simmer to more normal levels.

Over the past two years, the combination of low interest rates, stimulus assistance from Congress, and people’s flexibility in choosing where to live and work has spurred request for the handful of houses available, sending soaring house prices. The average selling price of existing single-family homes rose 15.2% in March from a year earlier, according to NRA.

Realtors, buyers and housing experts are noticing a slight cooling, but they say the market is still turning. For example, a seller may receive 10 offers instead of 20. But there is still a long way to go before the housing market returns to normal, experts say.

Mortgage rates hit 5%, ushering in new economic uncertainty

Becky Enrico-Crum, President of Boise Regional Realtors, in Idaho, works seven days a week to meet demand. And she is not expect a downturn anytime soon, as automakers simply can’t keep up. If no additional homes came up for sale in the Boise area, the supply of homes would run out in about three weeks.

“People think, ‘How far can this go, is this a bubble? Are we going to crash? said Enrico-Crum. “We really don’t have that, because it’s just going back to simple supply and demand.”

In New York’s Hudson Valley, home prices have seen one of the fastest increases in the country as wealthier households move out of New York and scoop up the few available homes. Ryan Basten, an associate broker in Ulster County, New York, said he doesn’t see a downturn, especially as new transplants bring in money to spend.

“Over the past two months, interest rates have gone from 3.5% to 5.5%, which is a dramatic increase, and I don’t see that affecting competition at all,” Basten said. .

“If it happens at 6, 7 or 8 [percent]so people may have a knee-jerk reaction to that, but I haven’t seen it yet,” Basten added.

But the changes on the other side of the country may start to tell a different story. In California, viewings of homes for sale fell 21% at the end of March, compared to the first week of 2022, according to home viewing technology company ShowingTime. This contrasts with the same period last year, when touring activity in California soared over 76%.

In Los Angeles and Orange County, the number of homebuyers applying for mortgages fell 18% in February from a year earlier, Redfin research shows. In San Francisco and San Diego, the decline was 13%. That was before the Fed enacted its first rate hike this year.

Same as the Fed tries to fix the housing market, its tools are limited. Rate hikes can’t build houses. Zoning rules and construction costs – spurred by supply chain issues and labor shortages – have caused more difficult for builders to meet demand.

Some Fed officials wanted a bigger rate hike in March despite the uncertainty

But the Fed may have more control over inflation in the housing market than in other parts of the economy. Russia’s invasion of Ukraine threatens to keep energy prices high for some time. Ongoing coronavirus-related shutdowns at Chinese manufacturing hubs have sparked a new wave of supply chain shortages that could also keep prices high for longer than expected.

Federal Reserve Chairman Jerome H. Powell is expected to speak more about the uncertainty and whether it could thwart inflation-fighting efforts on Wednesday following a two-day policy meeting days.

Over the past few weeks, several policymakers have cited rising housing costs as a top priority for easing the burden on families.

“As housing costs continue to rise, housing will likely become an increasingly important part of household budgets,” Fed Governor Christopher J. Waller said. mentioned in a March speech. “I will be watching real estate even more closely to judge the appropriate monetary policy stance.”

Waller sold his St. Louis home to a cash buyer without an inspection, and last month said, “I’m trying to buy a house here in Washington, and the market is crazy.”

There are parts of the country where housing costs have skyrocketed so much that it could be a long time before higher interest rates can ease the pain.

Redfin data revealed a stark example in Tampa, where homebuyers need to make $67,353 a year to pay the typical metro-area monthly mortgage payment of $1,684. That’s an increase of nearly 48% over the previous year, the largest increase of any major metropolitan area in the United States, according to Redfin.

In nearby St. Petersburg, Bob Jenkins is caught in the crossfire. He and his wife, Dianne, bought their three-bedroom, two-bathroom home nearly 44 years ago for $54,000 and had never seriously considered moving before. But lately, they’ve been bombarded with Zillow updates on their home’s soaring value, which hovers around $835,000. Bob Jenkins described it as “sitting on that pile of money”.

They thought about selling the house and renting it out a spacious apartment and hoped they wouldn’t have to shell out more than $1,900, which is about their monthly mortgage, insurance and property tax bill. But with average rents in the area rising such during the pandemic, they couldn’t find anything in this price range.

“In a way, we think we should cash in,” Bob Jenkins said. “In another way, I say, ‘Where are we going?’ ”

Kathy Orton contributed to this report.

Comments are closed.