Fed Easing Rate Hikes May Be Good News for Housing Market

Markets and lenders correctly anticipated the Federal Reserve's announcement of a 50-basis-point increase to the federal funds rate.
Kate Wood
By Kate Wood 
Edited by Alice Holbrook

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After four aggressive rate hikes, the Federal Reserve raised a key interest rate just one-half a percentage point Wednesday. New data showing that inflation continues to decelerate likely played into the central bankers' decision.

This announcement puts the federal funds rate at a range of 4.25% to 4.5%. Interest rates on consumer products, like home equity lines of credit, will increase in response. But given that many lenders have already priced in a 50-basis-point rate hike, mortgage interest rates might not head much higher based on this Fed move.

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Potential for muted impact on mortgage rates

Experts are mixed on how much higher mortgage rates could go in 2023. "We expect mortgage rates to rise back above 7% for the first part of the year, and then decline as the economy slows," Robert Frick, corporate economist for Navy Federal Credit Union, said in an email.

Others think the days of 7% interest rates for 30-year fixed-rate loans are in the rearview mirror. Mortgage rates "may have peaked," Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors, commented via email. "Rates are still more than double those of a year ago, but if inflation continues to slow down, rates may stabilize near 6%."

The good news? Though it will likely take time, the consensus is that rates will eventually go down. That would be a welcome shift for home buyers priced out of the market by rising interest rates. In October, despite a slight drop in home prices, the monthly principal and interest payment on a median-priced home topped $2,000, according to data from the National Association of Realtors, or NAR. That's beyond the reach of a household earning the median income and over $800 more than one year prior. Lower rates would help buyers' budgets go further.

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Home prices fall but don't crash

Sustained high prices haven't helped home affordability, but there could be hope on that front. October's median existing home price was $379,100, a slight decrease from September, according to the NAR, though housing prices remain up year over year.

"Home price increases have started to decelerate, and prices will likely drop overall next year," Frick said. "But drops will vary greatly by market, with many markets that have seen the highest appreciation experiencing the greatest declines." Housing prices have increased so much in the past few years that "giving up 5% or even 10% overall is not a big drop," Frick added. 

But these days, some homeowners find themselves in "golden handcuffs," reluctant to sign up for a new mortgage with a significantly higher interest rate. "People who just want to move really aren't moving," says Melissa Cohn, a New York City-based regional vice president at William Raveis Mortgage. She observes that most sellers are experiencing a financial change or life event that compels them to move. A limited inventory of homes for sale will likely create a floor for how far prices can fall, with demand exceeding supply.

What this means for home buyers

While experts predict mortgage rates will eventually decline in 2023, the Fed isn't done raising rates. Though these may taper to 25 basis points, until the central bankers genuinely believe inflation is slowing, interest rates should remain elevated.

Unless the economy takes a sharp turn into a recession, which would force the Fed to back off. That would be bad news overall but potentially good news for mortgage rates. Without the Fed's upward pressure, rates could meaningfully fall.

However they happen, lower interest rates could be the key to getting the housing market moving again. And while inventory might not increase enough to create competition among sellers, at minimum, buyers would have more options — because there'd be more homes for sale and paying less interest would give their budgets more leeway.

While these major forces shape the housing market, they probably don't determine whether you'll buy or sell in the coming year. "Focusing on your own situation and what you can afford is the best strategy," Frick said. "If you think home prices and rates are too high now, waiting for both to drop may be your best bet."

Your goals and employment outlook should matter more than what the Fed does.

A previous version of this article misstated Robert Frick’s title. He is a corporate economist at Navy Federal Credit Union. This article has been corrected.

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