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The real estate market has reached unprecedented heights since the 2008 financial crisis. Prices have continued to soar over the years, yet some analysts fear another crash is coming due to steadily rising mortgage rates. If the Fed continues tightening monetary policy, we may likely witness a sharp drop in house prices soon.
Fed is Interest Rate Decisions Affect the Real Estate Market
Last year, the Fed was presented with a serious risk of anchoring inflation expectations too high and consequently damaging its credibility. As a result, 10-year Treasury bond yields are currently around 4% which has naturally caused mortgage yields to rise (30-year rate) to approximately 7%. This spread between these two rates is higher than usual and emphasizes the expected volatility of rates; when mortgage lenders believe that interest charges can fluctuate quickly, they will tend to increase them.
Over the past few months, we have seen an unprecedented rise in housing prices, resulting in decreased affordability. The last time this occurred was back during the mid-1980s, making these occurrences all the more remarkable. According to Zillow’s Index, prices are now down 1% from their August highs; however, if tightened monetary policy doesn’t lead to a collapse of said real estate values, then what we may see is simply a stagnation – transaction rates will decline on both sides of supply and demand despite current market conditions.
Rising Interest Rates Decrease the Number of People Who Will Get a Mortgage
With rising interest rates, potential buyers are becoming increasingly hesitant to invest in new mortgages. This scarcity of investors has resulted in slower-than-usual house sales and a surplus of homes on the market. Homeowners with lower fixed mortgage rates feel more secure staying put which further decreases housing availability. Fortunately, as US labor markets remain very healthy, there is no need for distress selling at discounted prices by property owners eager to recoup their investments quickly.
Despite the recent turbulence in the real estate market, new housing now accounts for a significant 10% of all US property sales. With manufacturers keen to clear stocks and reduced mortgage rates proving attractive, these figures are only likely to grow following the Covid-19 recovery period; with more buyers entering the market, supply has increased too – leading many vendors to reduce their prices even further.
So, What Could Happen in the Future?
The most favorable outcome would be a shift in the economic climate and a decrease in inflation, resulting in more stabilized interest rates. This stabilization will lead to lower volatility between Treasury bill rates and mortgage rates, allowing housing prices to become attainable once again – thus ending the current freeze of the American real estate market.
A gloomy outlook implies that this stagnation of the real estate market will ultimately lead to a global economic recession due to the stringent nature of the monetary policy. Historically speaking, whenever housing recessions occur (which is when investment contributions from real estate into GDP drop by 1% or more), it has caused an overall decline in global economies since 1970.
How Fed’s Inflation Decisions Affect New Real Estate
The Federal Reserve’s inflation decisions can have significant effects on the real estate market in several ways:
- Mortgage Rates: The Fed’s decision to raise or lower interest rates can directly impact mortgage rates. When interest rates increase, mortgage rates also tend to increase, making it more expensive for homebuyers to finance a home purchase. This can lead to a decrease in demand for real estate, and a slowdown in the housing market. Conversely, when the Fed lowers interest rates, mortgage rates tend to decrease, making it more affordable for homebuyers to finance a home purchase. This can lead to an increase in demand for real estate, and a boost in the housing market.
- Housing Affordability: Inflation can also impact housing affordability. When inflation rises, the cost of goods and services increases, which can result in higher wages and higher home prices. This can make it more difficult for homebuyers to afford a home, leading to a slowdown in the housing market. Conversely, when inflation is low, home prices may be more affordable for buyers, resulting in an increase in demand for real estate.
- Investor Behavior: Real estate investors may also be impacted by inflation. When inflation rises, investors may seek out real estate as a hedge against inflation, as real estate assets can retain their value in times of inflation. This can lead to an increase in demand for real estate investment properties, resulting in a boost in the housing market. However, if inflation rises too quickly, it can lead to economic instability, which can negatively impact real estate investors.
- Consumer Confidence: The Fed’s inflation decisions can also impact consumer confidence in the economy. If the Fed is seen as taking appropriate steps to control inflation, consumers may have more confidence in the economy, which can lead to increased demand for real estate. However, if the Fed’s inflation decisions are seen as unstable or unpredictable, it can lead to a decrease in consumer confidence and a slowdown in the housing market.
Overall, the Fed’s inflation decisions can have significant impacts on the real estate market. The specific effects will depend on a variety of factors, including the severity of inflation, the state of the economy, and consumer and investor behavior.
