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3 Reasons Why the Fed Raising Interest Rates Is Good for Home Buyers

If you’re either in the process of buying a house or thinking of jumping into the market, you’re probably well aware that rates have jumped significantly in recent weeks. And that likely doesn’t feel or sound like anything good to you. 

But what you might not be well aware of is that, according to Chair of the Federal Reserve, Jerome Powell, raising interest rates is actually being done (at least in part) for the good of home buyers. 

With rates nearly double what they were not too long ago, you may be wondering where on earth the silver lining is. This Fortune article keys in on three things Powell is hoping the Fed’s actions will do for real estate buyers. Here’s a quick summary and how it can help you in your home search:

  • They hope it gives you a “bit of a reset” – In short, there haven’t been enough listings, and there are too many active buyers for the amount of available inventory. Ultimately, that is what led to bidding wars and prices continuing to rise. They’re hoping that raising the rates, it will help raise inventory levels and price some buyers out of the market, giving buyers who continue with their search for a home more time and options to choose from.
  • Potentially lower prices – Powell didn’t come right out and say that he hoped prices would fall, or they definitely would. In fact, he basically said he’s not sure if it’ll affect them at all, but that they’re keeping an eye on how it affects prices. The issue is still that there are not enough houses for sale. In order for prices to come down or at least level off, there needs to be an uptick in inventory. If you read between the lines, it sounds more like they’re hoping that “overvalued” markets will correct, but other areas will plateau or only see mild increases for some time, as opposed to the steep increases in the value we’ve been seeing. So, this isn’t a promise, and it will likely depend on other factors, but hopefully in Kansas City at least, we will get back to a more normal 4% yearly price appreciation in our home values. Keep in mind that they’ll also be sensitive to protecting the values and equity of homeowners to avoid causing homeowners financial issues or the inability to maintain or sell their house. It’s a balancing act, which is likely why he sounds a bit vague and says they’ll be watching it carefully.
  • They want mortgage rates to fall – Powell just wants to get inflation under control, and calm down the real estate market so that prices don’t get too out of whack with incomes. Once that’s done, he wants to see rates drop again. Now that won’t be in the next few weeks or months. In fact, it could take a couple of years before you see that happen.

The Takeaway:

While this certainly isn’t great news for every buyer in the market, it can be for you. The rate hikes will edge some buyers out of the market, but those who are qualified and in a position to buy at the higher rates will ideally benefit from lower competition and more homes to choose from at a less frenzied pace. 

I do not expect home prices to take a steep dive, which some buyers may be hoping for, because no matter what moves the fed makes, we will still have a shortage of available homes, we simply will have fewer buyers in the market to compete with. That can be a good thing if you already own a home and want to use the equity you’ve gained by using it to buy a bigger home, or downsize and pocket some of your gains. 

Lastly, even if you buy at a higher mortgage rate right now, know that the Fed wants to lower rates in the near future, so you can always refinance when they do. That’s exactly why we are seeing renewed interest in ARM’s (adjustable rate mortgages) these days.

So, even though it may not seem like the Fed raising rates is a good thing for you, it can be if you understand what they’re trying to do and are in a position to take advantage of the lower competition and increased inventory they’re hoping to create by doing so. If you’ve been sitting on the sidelines, waiting for the Kansas City real estate market to cool down, the next 6 months of this year will be a good time to make that move.

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