The Federal Reserve simply wants to combat increasing inflation to help the economy rebound from the coronavirus pandemic of 2020. Over the last two years, the housing market has been incredibly hot and led to low inventory, which made purchasing a home challenging.
So is now a good time to sell or buy a home? And are raising interest rates going to dramatically impact home prices this year? Here’s what you need to know about how interest rates impact home prices and whether now is the time for a real estate transaction.
How Interest Rates Impact Home PricesInterest rates do not directly impact home prices. However, when interest rates go up, so do the monthly payments for homebuyers, which can shrink their budgets. And because of that, the demand for homes could decrease, which can decrease the price sellers can get for their homes.
But what many people don't realize is that the driving factor in the hot housing market right now is more about a supply and demand problem and less about the historically low-interest rates that we saw over the last few years.
As millions of millennials entered the home-buying stage of life, there simply weren't enough new homes being built or enough older generations moving out of homes and into other living arrangements. That has led to limited supply during a time of wildly increasing demand.
The increases in interest rates will likely have a mild impact on that demand. But that doesn’t mean that home values are going to begin depreciating anytime soon. What experts expect is that appreciation will start to slow instead of the the 17.5 percent nationwide increase in value we saw in 2021.
Does the Federal Reserve Set Mortgage Rates?No, the Federal Reserve does not set mortgage rates. However, mortgage rates tend to follow 10-year Treasury yields. Changes in interest rates do change the tone for mortgage rates though.
Lenders and investors pay attention to the central bank and interpret the Federal Reserve's actions and how they will impact the market to set mortgage rates.
The Federal Reserve’s decision to increase interest rates in March of 2022 was the first increase since 2018. That increase was only a .25 percentage point increase. In May 2022, it increased interest rates another .5 percent, which was the largest increase in 22 years. June’s .75 percent increase was the largest in 28 years.
Experts say more increases are coming in 2022 and 2023. With more interest rate increases on the horizon, now is an ideal time for a real estate transaction if you’re considering buying or selling in the next two years.