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How Is The Housing Market Affected By Rising Federal Interest Rates?

  • October 11, 2022
  • James Beeson
  • Category: National Housing Market, Real Estate

The cost of borrowing money and using a bank to store your funds is determined by the interest rate. The amount you borrow or save over the year is used to determine interest rates. As a result, if you deposited $1,000 and earned 1% interest, you would have $1,010 a year later. And interest rates are one of the most important factors when you buy a property or a house. So how are the housing market and rising federal interest rates correlated?

What Factors Determine Interest Rates?

The amount that a lender charges a borrower for the use of assets on top of the principal is known as the interest rate. The status of the economy is one of several variables that affect the interest rate that banks charge. The interest rate is determined by the central bank of a nation, and each bank utilizes that rate to establish the range of annual percentage rates (APRs) that they provide.

When inflation is strong, central banks often increase interest rates since doing so increases the cost of lending, which deters borrowing and decreases consumer demand. Thus inflation is one of the major factors that affect the housing market and rising federal interest rates.

What Motivated the Fed to Raise Interest Rates?

The Federal Reserve’s two primary goals are to stabilize prices and work to maintain moderate long-term interest rates. If you’ve been keeping up with the news, you know how contentious inflation is. The economy is currently undergoing a rapid pace of price increases for several reasons, but the Fed can only influence the federal funds rate. Let’s just review how we got here.

Three factors have come together to create the global situation we are in: supply chain disruption due to pandemic-related economic shutdowns, increased economic activity brought on by COVID-19-related stimulus measures, and sanctions and blockades on Russian oil as a result of the conflict in Ukraine.

To stop inflation, the U.S. central bank raises the federal funds rate. However, because every other rate a lender sets swings with it, the federal funds rate affects all interest rates because it is the rate at which banks borrow from each other overnight. Particularly for larger loan amounts, increases of less than a percentage point might have a significant impact on borrowing.

Rate increases can occur more than once and frequently do. The federal funds rate has risen by 1.5% so far in 2022 after three increases. This positions it, as of this time, in the region of 1.5% to 1.75%.

A decade bond rate with the federal funds rate

The Federal Reserve of the United States sets the benchmark interest rate known as the federal funds rate. This interest rate is what banks charge one another for overnight loans. Thus any change in the interest rate by the Federal Reserve leads to a strong impact on the housing market and rising federal interest rates

Because it frequently acts as a baseline for other interest rates, this rate is known as a benchmark rate. Interest rates on everything, from savings accounts to credit cards, are partially determined by fluctuations in the federal funds rate.

The federal funds rate also affects the interest rates of bonds, such as the 10-year US government bond.

In the past, changes in the price of 10-year Treasury bonds have mirrored movements in the interest rate on 30-year mortgages. Mortgage rates grow in tandem with increases in the 10-year bond rate. For rate reductions, the same holds.

A lot of people may find it more difficult to purchase a home because increased interest rates entail greater mortgage payments each month.

Housing and price growth

Housing and price growth


The process by which money loses its purchasing value is called inflation. For instance, if inflation was 8.5 percent in the previous year, something that cost $100 then would cost $108.50 now.

Several mechanisms exist for inflation to affect the home market.

For starters, inflation raises the price of homes in the same way that it raises the price of all other things.

The Fed’s attempt to keep inflation under control and at a low pace is one of its objectives, nevertheless. To decrease the money supply and lower the inflation rate if inflation spikes sufficiently, the Fed may raise the federal funds rate.

Correlation Between the Housing Market And Rising Federal Interest Rates

In the next five years, the cost of a variable mortgage for real estate investors, such as landlords, is anticipated to rise dramatically. As a result, cash flow for property investors will probably be lower. In addition, section 24 was implemented in 2017, which meant that if you owned a property in your name, had a mortgage on it, and were a higher-rate taxpayer, you would have to pay a lot more tax on the property.

If interest rates continue to rise, many rental properties will probably stop producing as much money because the increased cost of borrowing has eaten into their cash flow. Although landlords may not be generating a profit, on paper they still are because of how profits are determined. As a result, to pay the tax each year, landlords will have to dig deeper into their pockets. The rising taxes and higher interest rates on real estate are expected to cause some property owners to sell their properties, according to experts.

Reduced Housing Market Activity

The major impact on the housing market and rising federal interest rates is the reduced housing marketing activity. At the moment, low-interest rates have made obtaining a mortgage more affordable, which has inflated the housing market. As a result, many renters in several parts of the world now find it more difficult to become homeowners.

The impact on the whole economy will be substantial because the income-to-house price ratio is at record highs.

Bottom line

Reduced Housing Market Activity

The Federal rates are continuously on the rise to cool down the economy from the rebounding of the recession after the pandemic. Due to this, the housing market is seeing extensive high prices and low levels of inventory. The strong correlation between the housing market and rising federal interest rates is evident from the factors mentioned above. Experts are of the view that the market will stabilize in the coming months and there will also be an increase in the housing inventory.