NewsThe Fed Raised Rates Again: How Will the Housing Market Respond?

The Fed Raised Rates Again: How Will the Housing Market Respond?


The Federal Reserve recently raised its benchmark interest rate by a quarter point, reaching a target range of 4.75%-5.0%, up from 0.13% in January 2022. A target range is where banks can adjust their rates to any percentage within the area, as opposed to hitting one set rate.

The Federal Reserve continues to raise its benchmark interest rate to slow the economy. While this may seem counterintuitive, the Fed intends to reduce inflation to an annual rate of 2.0%. However, from February 2022 to 2023, inflation increased by 6% across all items and increased by 0.9% from January 2023 through February. As the Fed grapples with rising interest rates, the housing market must also adjust to fit consumer demand.

How the Fed’s Rate Hike Could Affect Mortgage Rates

This latest increase could raise borrowing costs for individuals and businesses who take out loans, but how will it affect homebuyers, mortgage rates, and the housing market?

The Fed’s rate hike will most likely have little impact on mortgage rates since economists widely predicted the Fed to increase rates. Since economists expected the move, the housing market had time to prepare and adjust accordingly. The average 30-year fixed-rate mortgage decreased slightly after the Federal Reserve’s move, declining from 6.6% on March 16th to 6.42% on March 23.

Low Inventory Continues to Hamper the Housing Market

Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), points to low inventory as one of the primary problems affecting the current housing market.

“Inventory levels are still at historic lows,” Yun said in a press release. “Consequently, multiple offers are returning on a good number of properties.”

While inventory is low, building permits, housing starts, and housing completions skyrocketed between January and February. Building permits were down 17.9% annually but increased 13.8% between January and February. Housing starts fell 18.4% annually but increased by 9.8% monthly, while housing completions were up 12.2% monthly and increased 12.8% annually.

This growth suggests that housing inventory could expand, closing the gap between low supply and outpaced demand. With more properties on the market this winter compared to 2022, potential buyers have more opportunities to purchase a home. At the end of February, 980,000 housing units sat on the market, compared to 850,000 units last year. The most substantial factor contributing to more inventory results from decreased housing transactions after interest rates drastically increased last year.

Existing Home Sales Increased in February, While Prices Fall

After 12 straight months of declining sales, existing home sales finally posted a monthly increase in February, increasing 14.5%. Despite a 22.6% annual decline, February’s increase is the largest monthly growth in home sales in nearly three years.

“Conscious of changing mortgage rates, home buyers are taking advantage of any rate declines,” Yun explained. “Moreover, we’re seeing stronger sales gains in areas where home prices are decreasing and the local economies are adding jobs.”

The median existing-home price in February was $363,000, 0.2% less than a year ago. This slight decrease is the first time in nearly 11 years that existing home prices fell annually.

The Implications for the Housing Market and Buyers

The Federal Reserve’s latest rate hike likely will not significantly impact mortgage interest rates or the housing market. While mortgage rates and home prices are still high, there are positive trends for buyers, such as an increase in housing supply, decreasing mortgage rates, and stabilizing home prices. Prospective buyers considering purchasing property this year should consult their real estate agent to learn more about the changing market’s effects on existing properties.

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