How the Fed's Rate Increase Will Affect the Housing Market

It's been more than a quarter-century since the Federal Reserve raised the federal funds rate as much as it did in June -- up 75 basis points to make short-term borrowing costs 1.5-1.75%. 

What's the big idea? To slow inflation. Unfortunately, meeting the inflation objective increases the cost of mortgage borrowing, eventually cools down the hot housing market, and limits the number of people who qualify for a mortgage.

Fed officials expect rates to hit the highest rate since 2008

According to Fed officials, the benchmark rate is expected to hit 3.4% by the end of this year. Next year doesn't look any better, as a peak rate of 3.8% is expected by the end of 2023. Unfortunately, this is one full percentage point higher than previously estimated. As a result, mortgage rates have already jumped to over 6% for 30-year fixed rates, while retreating recently.

Supply and demand

Because of the extremely tight inventory levels, housing experts expect continued strong sales in the short term due to pent-up demand. Yet, the new rates will price some potential buyers out of the market. Lawrence Yun, NAR Chief Economist, noted, "It's painful that on the same $300,000 mortgage, the monthly payment rose to $1,800 today from $1,265 in December. Consequently, (it) will shrink the buyer pool."

David Dworken, president and CEO of the National Housing Conference, cautioned that "higher interest rates will only hurt low- and moderate-income families… (it) will do nothing to address the key driver of inflation in the housing sector: the persistent, long-term shortage of housing supply."

What's next

Mortgage rates are expected to continue to ebb and flow as the rates continue to increase in anticipation of Fed increases. Most experts expect the housing market to cool from its white-hot frenzy, but as Dworken noted, prices will likely remain high even if sales slow until the housing supply shortage can be addressed.

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