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Higher Interest Rates May Help Housing Market

For buyers, higher interest rates mean less home for the money. But the market may benefit if those rates create a better balance between the number of buyers and sellers.

WASHINGTON – Connor Fox thinks higher interest rates might be just what the housing market needs.

“We need that market stabilization,” said Fox, president of the Rock-Green Realtors Association in southern Wisconsin and a real estate agent with Century 21 Affiliated in Janesville.

The Federal Reserve Bank announced a half point hike to federal funds rate Wednesday as the U.S. economy wrestles with an 8.5% inflation rate – the highest in more than 40 years. It comes after a quarter-point interest rate hike in March. More Fed rate hikes are expected this year to help ease burdensome inflation hitting consumers and businesses.

The rate hikes have resulted in higher mortgage interest rates. A 30-year mortgage had an average interest rate of 5.27% as of May 5, according to Freddie Mac. Those are the highest since 2009, according to Freddie Mac’s Chief Economist Sam Khater.

Fox sees the housing market glass half-full with more expensive mortgages.

Higher interest rates could potentially help alleviate some of the inventory pressures confronting homebuyers throughout the country, as tight supplies and low mortgage interest rates have spurred significant demand for homes and continued buyer wars.

“We are still seeing people offer $20,000 to $30,000 over asking price,” he said, and buyers who can’t do that “get very discouraged.” For them, “It’s a very frustrating market right now.”

Fox said he’s been in the real estate industry for six years and has never seen mortgage rates above 4.5 %. He expects to see continued strong buyer demand as long as mortgage interest rates stay below 6%.

“People who want to buy a house are still going to buy a house,” Fox said.

Pandemic impact

Home prices across the country have jumped during the coronavirus pandemic while inventories have been constrained – including by supply chain and labor shortages.

The median home price in Wisconsin was $254,000 in March 2022, according to the Wisconsin Realtors Association. That is up from $189,900 in February 2020 before the pandemic – a 34% jump.

Winter coming for housing boom?

Higher interest rates will price out some potential entry level buyers – who have driven home sales in growth markets such as Florida, Arizona and Texas. Higher rates, along with inflation also adversely impact consumers.

“Mortgages now compared to just a few months ago are costing more money for homebuyers,” said Lawrence Yun, chief economist for the National Association of Realtors at a May 4 forum in Maryland. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”

NAR estimates a home purchase is now 55% more expensive than a year ago. Yun said inflation, which has seen significant rises in grocery and fuel prices, is also hitting the economy and workers.

“Wages have risen by 6% from one year ago and that’s good news,” Yun said, “but inflation is at 8.5%.”

Fox is optimistic that higher mortgage rates will help balance supply and demand for homes without adversely impacting the overall housing market. “I think there is a little bit of wiggle room,” Fox said of how high mortgage rates can go before overly subduing demand.

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