Key facts
- The Federal Reserve raised its benchmark interest rate to a target range of 3.75% to 4%.
- The Federal Open Market Committee voted unanimously 12-0 for the rate increase.
- Average mortgage rates have risen from 6% in late February to 7% this week.
- U.S. and global oil prices are trading at near four-month highs, around $97 to $108 per barrel.
- Most Fed officials expect at least one more rate increase before year-end.
The Federal Reserve's decision on Wednesday to raise its benchmark interest rate to a target range of 3.75% to 4% is expected to have a significant impact on the housing industry. Real estate professionals are anticipating a market that could further deter first-time homebuyers and cause sellers to reconsider pandemic-era price expectations.
The Federal Open Market Committee's unanimous 12-0 vote marked the first rate increase after five consecutive meetings where rates were held steady. While mortgage rates are more closely influenced by long-term Treasury yields, the psychological impact on buyers and sellers is immediate, according to Abraham Sarway, a New York City broker for Douglas Elliman. He noted that clients are adjusting to a higher rate environment, influenced by geopolitical events and high 10-year Treasury yields, affecting buyer confidence.
For real estate agents, the challenge involves managing client expectations and ensuring deals remain viable. Mike Miedler, President and CEO of Century 21, stated that affordability is a broader consideration than just mortgage rates, encompassing the cost of groceries, gas, and childcare. He suggested that if the Fed's decision helps lower these costs, it could positively impact housing affordability.
Louis Puopolo, head of Douglas Elliman’s New York City commercial division, commented that the labor market has not weakened enough to counteract renewed inflation concerns. He believes that as long as employment remains strong and consumer prices continue to rise, the Fed will prioritize price stability over employment support, allowing for further rate increases.
Lawrence Yun, Chief Economist at the National Association of Realtors, pointed to sharp increases in oil prices and their influence on housing. He noted that mortgage rates rose from 6% in late February to 7% ahead of the Fed's rate hike, driven by inflation concerns stemming from oil price shocks. Yun added that the growing federal deficit, leading to increased government borrowing, also reduces capital availability for the private sector, including mortgages. U.S. and global oil prices are currently trading at near four-month highs, around $97 to $108 per barrel, a 19% increase over the past month and a 57% surge year-over-year, largely due to Middle East conflict.
Yun suggested that mortgage rates could decrease if oil prices retreat and a credible plan to reduce the budget deficit is implemented. He also noted that AI technology boosting worker productivity could lower inflation and long-term borrowing rates, but these developments are uncertain in the coming months, leading to an expectation of 7% as the new normal for mortgage rates. Job additions are seen as a key factor supporting homebuying.
Sarway emphasized that individual circumstances vary, and a blanket strategy for sellers with low rates is not feasible. He advised clients to consider their overall balance sheet and personal financial goals. When asked about the initial impact of elevated rates, Sarway predicted a decrease in transaction volume, particularly in the luxury market, rather than an immediate impact on pricing, which he believes is more influenced by local legislation.
The Fed's updated projections indicate that most officials anticipate at least one more rate increase before the end of the year, suggesting that the affordability squeeze in the housing market is likely to persist.