Are you nervous about what will be happening with the interest rates? Over the past year, we've watched interest rates continually climb out of a period when rates have been at record lows. The US housing market and economy got hooked on low interest rates, and now we are feeling sticker shock as they climb back up.
For homebuyers, the difference between a 3.5% interest rate and a 6.5% interest rate is astronomical, so it’s no surprise that the market is reacting.
Why is the Federal Reserve raising interest rates?
Over the past few years, the US experienced nearly record-high inflation, largely driven by supply chain breaks during the COVID-19 pandemic, which has become a cause for concern for many. When inflation rises, the purchasing power of currency decreases as consumers have to spend more to buy the same goods and services. This impacts the economy and can lead to decreased consumer spending and reduced economic growth. As a result, the Federal Reserve is raising interest rates to battle inflation. Unfortunately, inflation isn't coming down quite as quickly as needed, so the Fed has continued implementing rate hikes.
High inflation is everyone’s enemy.
Let's take a step back a year when the market was at the tail end of an unprecedented craze. Home price growth was out of control, buyers watched as the market walked away from them, and inflation was eating hard at everyone's wallet. A slow real estate market may be frightening, but nothing can be more damaging to our economy than high inflation. As painful as higher interest rates are today, the Federal Reserve has to reign inflation under control.
Where is inflation, and where does it need to be?
The US saw a 6.5% rise in prices in December 2022, per the Consumer Price Index's measurement of monthly inflation for goods and services. Higher interest rates are working because inflation is down from a high of 9.1% in June 2022. However, the Fed has maintained a target inflation rate of around 2%. That means we still have a lot of time and a few more interest rate hikes before we reach the Fed’s target.
Are interest rates really that high?
The US economy has a short memory. Over the past two decades, consumers became comfortable, if not addicted, to sub-5 % interest rates. But historically, those rates have not been the norm. During the early 1900s, mortgage rates were often around 6%. After the Great Depression, rates dropped to around 4% and remained low until the 1970s, when they began to rise again. Finally, during the late 1970s and early 1980s, mortgage rates reached an all-time high, with some rates exceeding 18%.
When will rates drop?
The magic question, with no definitive answer! However, if you're a homebuyer waiting for rates to drop back to 2021 levels, you might be waiting decades. So instead, focus on how much you're paying for a home. Fortunately, it's possible to refinance your home mortgage. However, you might not have the same opportunity to buy your dream home again. Housing supply is still tight, and we expect home prices to be resilient and continue climbing over the next year.