Housing Market is ‘Overly Sensitive’ to Fed Rate Hikes. Experts Weigh In on What’s Next.

It’s been a year since the Federal Reserve began its campaign to raise interest rates to curb inflation, and it seems to have finally stopped the housing market boom. After 131 months of uninterrupted price growth, the median existing-home price for all housing types dropped by 0.2% to $363,000 in February compared to the previous year, according to the National Association of Realtors.

The Fed has increased the federal funds rate eight times, with plans for another hike, pushing towards a target rate of 5.1%. The pandemic housing market boom, which had seen home prices climb by 40% in just two years, began to level off during the latter half of 2021.

Experts Weigh In on How the Federal Reserve’s Rate Hikes Affect the Housing Market

Daryl Fairweather, the chief economist at Redfin, says that the Fed has been too effective in speeding up and slowing down the housing market, making it overly sensitive to fluctuations in interest rates. For example, from December 2021, when the Fed first announced its intention to raise short-term interest rates to combat inflation, mortgage rates began steadily rising. However, opinions differ on how different the outcome would have been had the Fed not intervened in the market.

According to Lawrence Yun, chief economist of the National Association of Realtors, falling home prices are a casualty of the Fed’s policy, resulting in the loss of home values for some homeowners aside from regional banks. Moreover, he suggests that prices would not have fallen if the Fed did not raise interest rates so aggressively.

On the other hand, Abbey Omodunbi, PNC Senior Economist, believes that house prices were already rising due to the demand-supply imbalance in the market and that the Fed’s tightening of monetary policy only amplified that effect.

Related Facts

• After a record high of $413,800 in June 2021, home prices began to decline month-over-month, albeit recovering slightly in February 2022.
• Homebuyers flocked to the market in Q1 2022 to beat anticipated mortgage rate hikes, resulting in one of the most competitive quarters since the onset of the pandemic.
• The housing market had been growing for 131 months, marking the longest price growth streak on record.

Key Takeaway

Despite the opposing views on how significant the Fed’s intervention was in the housing market, what stands out is the market’s sensitivity to interest rate fluctuations, indicating how easily it can sway either way.

Conclusion

The U.S. housing market is undoubtedly “overly sensitive” to changes in interest rates, as demonstrated by the halting of the longest-ever price growth streak after the Federal Reserve began raising rates. The impact of the Fed’s policy on home prices has generated differing opinions. Still, experts agree that the housing market is highly reactive, and ease of policy may have inflated a bubble. With the Fed pushing towards a target rate of 5.1%, it will be interesting to see how the market responds in the future.