The Impact of Interest Rate Hikes on the Housing Market

By Mick Harris

On May 4, after a two-day policy meeting, U.S. Federal Reserve Chairman Jerome Powell announced the first of what is likely to be several interest-rate increases in 2022. The first, a 50-basis-point increase, is the single highest hike in 22 years—and it is only the beginning. During his remarks, Chairman Powell indicated that more rate hikes are on the horizon.

While the move is intended to curtail inflation, the ripple effects on the residential housing market are bound to trip up prospective homebuyers. This increase comes during an already turbulent time for residential real estate, as prices have climbed steadily in recent years, particularly in metropolitan areas, such as Portland.

According to Redfin, “In March 2022, Portland home prices were up 6.8% compared to last year, selling for a median price of $550,000.” Add higher interest rates into the mix and mortgages will be even harder to obtain. This is a serious issue, as housing affordability looms large for Portlanders and others in expensive metropolitan markets.

Does this mean a housing market crash is looming? It’s always possible, but far from guaranteed. The 2008 housing market crisis was largely the result of subprime lending issues, which ultimately led to heavy foreclosures and slumping demand. The current situation is different, as demand is the central force driving housing prices higher. However, demand will decrease as affordability issues rise.

In fact, prior to the Fed’s recent actions, the housing market already showed signs of slowing across the nation. As the Washington Post reported, “The combination of the limited number of homes for sale, continued double-digit price increases and the sharp rise in mortgage rates is taking a toll on home sales across the United States. New home sales were down 12.6 percent in March compared with March 2021, according to the Census Bureau.”

The National Association of Realtors (NAR) also noted slowing: “Existing-home sales fell for the second straight month in March to a seasonally adjusted annual rate of 5.77 million. Sales were down 2.7% from the prior month and 4.5% from a year ago…The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power.”

Chairman Powell’s remarks, particularly his comments about anticipating several future interest rate increases, have thrown a curveball into the already complex calculation for homebuyers. As a result, potential purchasers must plan accordingly.

As always, if you have questions about real estate or any other topics, let us know—we’re here to help.