The Impact of Today’s Higher Interest Rates on the Housing Market

Interest rates in real estate in the US remain elevated, and as a result, the housing market continues to be in turmoil. In March 2024, home sales fell by almost 4.3% versus February’s home sales. Compared to March 2023, home sales in March 2024 were down by 3.7%. 

The Fed, or the Federal Reserve, responsible for the federal funds' target rate, maintains it even though it is at its highest in the last 17 years. The average 30-year mortgage rate across the country is above 7% at present. The housing market in the US has been at its costliest in the last few months. 

Correlation Between House Prices And Interest Rates 

The relationship between interest rates in real estate and the housing market in the US is direct. The higher the rates, the less affordable dream homes are for potential buyers compared to a few years back. Not to forget, home values are also rising substantially, making it almost difficult for buyers to get the best deals.

Fed’s Rate Adjustments

To return to where it all started in 2022, the Fed increased rates to above 5% to address inflation. As a result, home mortgage rates rose along with the Fed rates. However, in mid-2023, the Fed stopped increasing rates but did not cut them. So far, there is no clear indication from the Fed about any rate slash. 

As is evident from the March 2024 home sales data, sales are continuously dropping even though the demand for homes remains pretty encouraging.

As per Rob Haworth from US Bank Wealth Management, the uncertainty is removed as the Fed has stopped raising rates. This means that mortgage rates are not going to increase in the near future, allowing buyers to budget accordingly to buy a home. 

The correlation between house prices and interest rates is significant. When both are increased, it means that buyers need to be prepared to either pay more down payment or increase their monthly budgets to bear housing costs.

Recent Trends & Activity in the Housing Market in the US 

After Fed rates were increased, the demand for homes and prices of homes fell between July 2022 and January 2023. From February 2023 onwards, home prices recovered, and by October 2023, the prices were skyrocketing. Home prices are at present 7.3% up from last year. The correlation between house prices and interest rates has diminished activities for housing in the market, so much so that mortgage applications recorded the lowest levels in 2023 since 1995.

Comparatively, the new home construction market is showing encouraging trends. Compared to last year, the sales recorded in March 2024 were up 8.3%. 

As per the existing trends, housing in the market is one of the costliest due to higher prices of homes and increasing mortgage rates.

Impact on REITs and Capital Markets

Even in the area of portfolio diversification in real estate or REIT, unfavorable interest rates have recorded underperformance for REITs, too. The demand is at an all-time low. Needless to say, housing in the market drastically affects capital markets as well as the economy at large.

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