Professor Cal Poly: The interest rate, raised to fight inflation, could eventually lower housing prices, but will initially make housing even more unaffordable for Americans now unable to buy

SAN LUIS OBISPO — While the Federal Reserve’s actions to raise interest rates have put home ownership even further out of reach for many Americans, these ever-increasing costs could eventually help potential buyers, the president said. of Cal Poly’s finance department.

“House prices are more likely to fall over the longer term as the Fed maintains its course of fighting high prices with tight monetary policy,” said Ziemowit Bednarek, associate professor of finance. “In that sense, there is certainly hope for potential buyers.”

Hope is not something non-wealthy home buyers have experienced in recent years.

The median price of existing homes in the United States hit a record high of $407,600, according to Reuters. This is 14% more than last year.

The situation in California is even worse. Oscar Wei, deputy chief economist for the California Realtors’ Association, told KSBY-TV that only one in five households in the Golden State could afford a median-priced home — a significant drop from the one in three who could do it just two years ago.

While the 3% mortgage rate was attractive to buyers during the pandemic, the lack of available homes led to a seller’s market that pushed prices up.

But now that interest rates have risen, mortgage rates have also risen, which means that already expensive homes will be even more expensive to finance.

“In times of restrictive politics or high interest rates, loans are more expensive for businesses and individuals,” Bednarek said.

Hoping to reduce record inflation while preventing a recession, the Fed has raised the interest rate three times since March – with more pencils this year. This in turn translates into a higher mortgage rate, which has doubled to 6%.

The impact is obvious to the consumer: the monthly mortgage for a $250,000 home would cost $356 more, while the mortgage for a $750,000 home would cost $1,067 more each month, according to the Washington Post.

Yet again, there is some hope. Because eventually people will probably stop buying houses.

“Expensive loans will dampen consumer demand and, at least in theory, lead to lower demand in the housing market – and therefore lower prices,” Bednarek said.

But there is a caveat: “Since the onset of the COVID 2019 pandemic in March 2020, the economy has undergone a number of structural changes – one of which is working from home,” Bednarek said. “People realized they could move somewhere cheaper and keep their jobs by working online. Of course, that sent prices skyrocketing in these initially cheap markets.”

Additionally, higher interest rates could impact new home construction, which has already stalled during the pandemic, contributing to higher prices.

“Businesses will be less likely to expand and hire, which will only worsen the shortage of new homes,” he said. “This part may, in fact, counteract the effect of expensive credit on the housing market itself and keep existing home prices up.”

Recent developments are prompting mortgage rate strategies. Buyers who locked themselves into a 15 or 30 year fixed rate mortgage would be protected against future interest rate hikes. However, there are occasions when a more unpredictable variable rate mortgage might make sense.

“If you don’t plan to hold on to the home for too long, or if interest rate increases aren’t expected to last, it may make more sense to go with an ARM,” Bednarek said. “Given the current situation in our market, it looks like the Fed is poised to continue raising interest rates for the foreseeable future.”

June 23, 2022
Contact: Pat Pemberton
(805) 235-0555; [email protected]


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