How will Federal Reserve's Rising Interest Rates Impact the Red Hot Housing Market

Guest Author: Sana Ahmad (Click here for Real Estate Listings)

Realtors know that there are many cause and effect levers that can impact the real estate industry. Beyond the supply and demand, one key factor that can cool down a hot housing market, is the increase in mortgage rates. The interest rates set by the Federal Reserve have a direct impact on mortgage rates. If you're wondering what The Federal Reserve System is, it is the central bank of the United States. In U.S, there are 12 Federal Reserve Banks and 24 branches; all of these together form The Federal Reserve System. These Federal Reserve Banks are the operating arms of the central bank.

Most of my clients are either first time home buyers or investors who want to diversify their portfolios. Real estate has always been an investment strategy, both for short term and long term. In Texas, where I practice as a licensed realtor, the real estate market has gone from hot to fuming in a matter of years. The pandemic also played a part in this, as Texas saw many people relocate from high rent or buying states to Texas. This of course led to a supply and demand issues, especially in premium cities. Austin for example also has Elon Musk to thank for relocating from West cost and opening a factory in Texas.

Supply and demand can also impact inflation, as scarcity can induce price hikes. We've seen this in the real estate market in Texas, coupled with low mortgage rates. With car prices and other day to day items increasing in price, inflation has become evident. To control the inflation concerns, the Federal reserve use interest rates to impact the borrowing habits and manage supply demand. As of April 7th, 2022, the mortgage rate has now crossed 5%, which is a first since 2013. 

Bank of America (BofA), based on Federal Reserve's decisions projects that there will be at least 3 rate high hikes through end of Q2 and beginning of Q3, followed by consecutive rate hikes till at least till May of 2023. These rate hikes will have a direct impact on the housing market, as the cost of borrowing will go up and therefore the mortgage payments will increase. 

Mortgage rates 2022

The buyers and sellers should not rush to conclusions and make rash decisions. I highly recommend that experienced real estate agents who have seen all these cycles before, can provide guidance to the buyers and sellers alike. We are here to support you and I'm looking forward to helping my clients anyway I can.