The Last Hike? Fed Raises Interest Rates for the 10th Time

On May 3, 2023, the Federal Reserve raised its benchmark interest rate by a quarter point, marking the tenth hike made by the central bank since March 17, 2022. This is part of the Fed's ongoing effort to combat inflation, which has reached a 40-year high.

Getting inflation under control is obviously important, as runaway inflation can lead to serious economic issues. The problem, of course, is that raising the base rate to combat inflation is similar to using radiation therapy to fight cancer. Sure, it might work, but there’s a good chance it makes you miserable in the process. Especially if you work in real estate.

Here We Go Again

The Fed's interest rate hikes have already had a significant impact on the real estate industry. Higher interest rates have made it more expensive to borrow money, as banks and other lenders increase the interest rates on their mortgages. We’ve seen this clearly, with mortgage rates hitting new highs left and right. On paper, this leads to a decrease in demand for homes. Fewer borrowers would be willing to take out these loans, and fewer banks are willing to approve a loan for prospective borrowers without stellar credit.

The ripple effect of something like this is clear. This could put downward pressure on home prices and could make it more difficult for first-time homebuyers to get into the market. In other words, rate hikes make no one happy - not buyers that are priced out of the market, not sellers that find themselves having to lower the price on their home in order to sell it, and not the real estate professionals who work tirelessly behind the scenes to make it all happen. This is, of course, why any new Fed rate hike isn’t exactly welcome news to the real estate industry.

Real World Repercussions

Of course, market predictions don’t always line up with what actually happens in real-world conditions. It's important to note that the impact of the Fed's interest rate hikes on the real estate industry varies depending on a number of factors, including the overall health of the economy and the level of demand for homes in a particular market. In some markets, the impact of the Fed's interest rate hikes has been relatively muted. For example, in markets where there is a limited supply of homes and strong demand from buyers, home prices may continue to rise even as interest rates increase.

In other markets, the impact of the Fed's interest rate hikes may be more pronounced. For example, in markets where there is an oversupply of homes and weak demand from buyers, home prices may fall more sharply as interest rates increase. This means that the impact of the Fed's latest interest rate hikes on the real estate industry is likely to be mixed. In some markets, the impact may be relatively muted, while in other markets, the impact may be more pronounced. It's important to stay up-to-date on the latest economic news and trends to get a better sense of how the Fed's interest rate hikes may impact the real estate market in your area.

Hope for the Best, Prepare for the Worst

The job of any good real estate professional is to be prepared for market movements and understand what the possibilities are that exist on the horizon. No one wants to see the sector they work in pivot to become less advantageous, but you’d better have a plan in place in case it does. So even as real estate agents remain hopeful that the Fed’s rate hikes are coming to a close or that their chosen markets won’t be as hit as hard as others, it’s still wise to think about what the worst-case scenarios are. Here are some specific ways that the Federal Reserve's interest rate hike could impact the real estate industry:

• Decrease in demand for homes: Higher interest rates will make it more expensive to borrow money, which could lead to a decrease in demand for homes. This could put downward pressure on home prices and could make it more difficult for first-time homebuyers to get into the market.
• Increase in mortgage rates: Mortgage rates are directly linked to the Federal Reserve's interest rate. As the Fed raises interest rates, mortgage rates will also rise. This will make it more expensive to finance a home purchase, which could lead to a decrease in demand for homes.
• Increase in housing affordability challenges: Higher interest rates and rising home prices will make it more difficult for many people to afford to buy a home. This could lead to an increase in the number of people who rent instead of owning a home.
• Decrease in home sales: As demand for homes decreases and prices rise, the number of homes sold is likely to decrease. This could lead to a slowdown in the real estate market.
• Increase in foreclosures: As more people struggle to afford their mortgage payments, the number of foreclosures is likely to increase. This could lead to a decrease in home values and could further dampen the real estate market.

The Fed’s interest rate hike is likely to have a negative impact on the real estate industry. We know this because it already has to some degree - the volatility of mortgage interest rates has caused all sorts of havoc and will continue to do so.  However, the impact of this latest hike will vary depending on a number of factors, including the overall health of the economy and the level of demand for homes in a particular market. Smart real estate professionals know that hedging their bets by staying prepared will help them weather this storm.