What do recent comments by the Fed mean for your market?

The real estate market is in a tizzy over the rising mortgage rates. While most experts advise homebuyers, sellers, and agents not to worry, there is still major concern. Now people are even more stressed as the Federal Reserve enacted its second consecutive .75% interest rate increase to counter rising inflation.

The Fed has made several comments regarding the increase that may provide insight on the current and future market. Let’s take a look at what’s to come.

Here’s what Fed Chair Jerome Powell had to say on the recent interest hikes:

“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.”

“Think about what a recession is. It’s a broad-based decline across many industries that’s sustained more than a couple of months. The real reason is the labor market has been such a strong signal of economic strength that it makes you question the GDP data.”

“We think it is necessary to have growth slow down. Growth is going to be slowing down this year for a couple of reasons. We actually think we need a period of growth below potential in order to create some slack.”

So, what does this mean for the current market? Here are some ways the interest rate hikes will impact the real estate market:

For homebuyers:

Lower loan amounts: Rising interest rates mean payments will be higher so buyers will qualify for lower loan amounts. This could be particularly difficult for first time buyers who will have to offset low loan amounts with higher down payments.

Difficulty finding homes in your price range: While some sellers will need to lower prices to offset the rising interest rates this won’t happen right away, especially considering that interest is still historically low. This could mean that some buyers are priced out.

Higher mortgage payments: The Federal Funds rate sets the lending rate between banks and credit unions. Banks that borrow at the Federal Funds rate need to charge a comparable rate to the people that borrow from them. So, a Federal Fund rate increase leads to higher mortgage rates, credit card rates, and car payments.

Consider renting vs. buying: With interest rates increasing, some people may hold off on buying choosing to rent instead. However, rising mortgages will also increase rents. Rents may go up even faster than mortgages.

For home sellers:

Fewer interested buyers: High interest rates mean fewer people will be interested in buying so homes will sell slower and generate less profit.

It may be difficult to find a new home: The limited inventory may make it difficult for sellers to find a new home.

Your home may sell for less: Many sellers are having to lower their prices to make up for the rising interest rates and lack of buyers.

For homeowners

Adjustable-rate mortgages increase: If you have an adjustable-rate mortgage, it could be going up. However, this will depend on the caps of your mortgage contract and how far your rate is from current market rates when the adjustments happen.

Refinancing may be difficult: If you are looking to refinance you are unlikely to get a lower rate if you have recently taken out a new mortgage. However, the rising prices could increase your equity which would be advantageous in situations such as debt consolidation.

For example, it’s likely the interest rate on your home is lower than the interest rate on your credit card. This could allow you to roll your debt into your mortgage and pay it off at a lower rate.

The Fed’s actions will carry out differently in different states. Here’s what it can mean for some regions, including yours.

Florida: Many Florida home sellers are responding to rising interest rates by lowering their prices which is helpful to first time buyers. However, buyers are still getting cold feet leading them to stay in their apartments. While some areas of the state are affordable, others are quite expensive leaving would-be buyers between a rock and hard place.

Commercial and multifamily borrowing and lending is not fluctuating much despite higher rates.

Arizona: Arizona’s rising interest rates are causing many people to continue renting, but it’s still a sellers’ market so far. Some homes are getting several bids. But the state is seeing fewer buyers looking to waive requirements so they can make their offers look more attractive.

Texas: First-time buyers in Texas are having a particularly hard time buying homes due to the lower loan rates and rising interest. At the same time, in some areas of Texas, like DFW, the rise of home prices happened too fast and has made the mortgage application rate plummet. While this isn’t great news, it has benefited buyers’ by not making every home purchase a bidding war where they will need to pay over asking price.

The rising interest rates are causing some would-be home buyers to wait it out, but we are still seeing a seller’s market in many regions. Most experts advise those who can afford it to move forward with their real estate transactions as rates are still low and no one actually knows what the future holds. 

Chris Heller is a real estate industry expert, best-selling author and currently serves as the chief real estate officer at Ojo Labs.

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