East Bay Market Update - October 2023 | Blog

The Impact of Rising Interest Rates on Real Estate and the Economy

The unprecedented surge in interest rates in 2022 and 2023 and the impact on the real estate market have ignited discussions in housing and financial circles. This month’s newsletter explores key elements of this conversation and how it affects the consumer.

Interest Rates, Inflation, and the Jobs Report

The September Jobs Report exceeded expectations by adding 336,000 new jobs, putting pressure on the Federal Reserve to consider another interest rate hike. As we have seen in real time over the past year, interest rates play a critical role in shaping the economy and housing market by influencing borrowing costs and investment decisions. While we don’t yet know if the Fed will go through with another increase, the real estate, building, and mortgage industries have been vocal about what another hike means for the ability to build, buy, or sell real estate.

The Federal Reserve's historic efforts to combat inflation began with a series of interest rate hikes, which pushed mortgage rates above 7% and abruptly slowed down the booming pandemic-driven housing market. According to forecasts by researchers at the San Francisco Federal Reserve, we might be on the brink of experiencing the most significant decline in shelter inflation since the Global Financial Crisis of 2007 to 2009. (Source: CNN)

Rolling Recession

Rising interest rates can contribute to a recession by increasing borrowing costs, potentially reducing consumer spending, business investments, and housing demand. Gary Keller, co-founder of Keller Williams, has warned of a “rolling recession” that may affect different industries at different times in specific ways. Locally, residential real estate sales have slowed notably year over year, and prices are down 15-20% off of their highs in spring 2022.

The complex relationship between Federal Reserve interest rate decisions and the economy affects various industries differently. The real estate sector, in particular, grapples with the impact of these rate hikes and their implications for housing market stability. It’s essential to stay informed as economic conditions evolve.

Federal Reserve’s Interest Rate Hikes

The Fed’s decision to raise interest rates has evoked mixed responses. While intended to curb inflation and ensure economic stability, critics fear it may slow down borrowing, investment, and spending, harming the real estate market and the overall economy.

Comparing Interest Rates

To put the interest rate changes in perspective, in 2022, the average 30-year fixed mortgage rate was around 3.0%, while in 2023, it rose to approximately 3.5%. For a million-dollar loan, this equates to an annual difference of $5,000 in interest payments.

Federal Funds Rate - 62 Year Historical Chart

History of the Fed Funds Rate

The chart above shows the daily federal funds rate going back to 1954. Simply put, this is the interest rate at which banks and credit unions lend reserve balances to other depository institutions on an uncollateralized basis. As of October 12th, 2023, the fed funds were 5.33%. In recent history, this is around where we were in the late 1990s, 2006, and 2007 and far below where we were in much of the late 1970s and 1980s. (Source: Macrotrends)