3 Factors Why Federal Reserve Rate Hikes Won’t Materially Slow The Housing Market

3 Factors Why Federal Reserve Rate Hikes Won’t Materially Slow The Housing Market

slow housing market

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In the short term, Federal Reserve interest rate hikes could cool down home prices, but in the long run, they could make the lack of supply in the housing market even worse.

Home prices remain high, and there are few signs they’ll drop anytime soon. Many economists predict they’ll continue to rise through 2022.

A rate hike can make all kinds of loans more expensive, including the loans developers must take out to build homes.

“It’s yet another factor that’s increasing the cost of construction,” said Robert Dietz, chief economist with the National Association of Home Builders. 

The idea that Fed rate hikes will materially slow the housing market may or may not happen this time. Three factors could make the housing market more robust to higher rates.

1. Consumer balance sheets are historically robust

Households’ financial positions in 2022 are significantly better than in 2019, according to Brookings. Savings have increased in bank deposits and other financial accounts, real estate and stock market wealth has increased, and borrower distress has decreased.

“Relative to the overleveraged consumer of the 2000s, a decade of balance sheet deleveraging and the forced savings of the COVID era put the consumer on a very different financial footing,” tweeted @JessicaNutt96.

2. Housing is an increasingly scarce asset as millennials grow up, settle down

The U.S. is more than 3 million homes short of the demand from would-be homebuyers, exacerbated by pandemic-related supply chain problems. The roots of the problem go back to the global financial crisis and housing bubble collapse in 2008, NPR reported.

In the worst housing market crash since the Great Depression, many homebuilders went out of business and their workers had to find jobs in other industries. “A bloodbath happened,” said homebuilder Emerson Claus, who was building houses in Florida at the time.

“A lot of my tradespeople found other work, went and got retrained for new jobs in law enforcement, all sorts of jobs. So the workforce was somewhat decimated.”

When Americans started buying more homes again, building remained below normal and that continued for more than 10 years. Meanwhile, millennials, the largest generation in the U.S. with an estimated population of 72.1 million in 2019, started to settle down and buy houses.

Millennials are the fastest-growing segment of homebuyers, accounting for 37 percent of the overall U.S. housing market, according to Bankrate.com. They make up a huge share of first-time homebuyers. In all, 82 percent of younger millennial buyers (age 22-30) and 48 percent of older millennial buyers (31-40) bought their first homes between July 2019 and July 2020.

Held back by financial considerations such as hefty student loans, millennials have been slower to buy homes and many are reaching life milestones later. They’re marrying later, starting families later, and rent for an average of six years before buying, according to Zillow.

3. Fed rate hikes have no effect on housing demand if buyers pay cash instead financing the property

The average interest rate on the most popular U.S. home loan climbed to 5.2 percent — a 12 year high — the week ending April 15. That’s 2 percentage points higher than a year ago, and up from 5.13 percent a week earlier. Fewer homebuyers applied for mortgages, a sign that the Federal Reserve’s goal of slowing inflation and cooling the housing market may be having an impact, according to data from the Mortgage Bankers Association.

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However, Fed rate hikes may not affect housing demand if the property is paid for in cash. All-cash sales accounted for 28 percent of real estate transactions in March 2022, up from 23 percent in March 2021., according to the National Association of Realtors (NAR).

“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” said Lawrence Yun, chief economist at NAR. “Still, homes are selling rapidly, and home price gains remain in the double-digits.”


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