The Federal Reserve announced on Wednesday plans to rapidly end its bond-buying program, and projections indicate three expected interest rate hikes in 2022. The plans reflect an effort to combat inflation and wind down pandemic-related stimulus. The announcement comes after the target interest rate has stood at close to zero since March of 2020, when the target rate was cut from the 1.5%-1.75% range down to the 0%-0.25% range in response to the pandemic.
Recent History Of The Federal Reserve’s Target Interest Rate
After the 2008 recession, the target interest rate was cut to the 0%-0.25% range for an extended period of time in order to stimulate the economy. It stood at that rate until December of 2015, when the Federal Reserve raised the target interest rate by a quarter point as the economy showed continued signs of growth. The target interest rate continued to rise into 2019, when it reached its most recent high of the 2.25%-2.5% range.
Decreases over the next few months took the target interest rate to 1.5%-1.75% in November of 2019 and into February of 2020. In response to the pandemic and the need for economic stimulus, the Federal Reserve sharply cut the interest rate to 0%-0.25% in March of 2020, where it has stood since then. Projections now indicate three rate hikes in 2022, followed by additional rate hikes in both 2023 and 2024, when the target interest rate is expected to enter the 2.00%-2.25% range.
What The Rate Hikes Mean For The Real Estate Industry
As a general rule, any increase in interest rates puts downward pressure (or reduces upward pressure) on the real estate market. This is due to increased cost of ownership associated with high interest rates on loans utilized to purchase property. Conversely, when interest rates drop home affordability increases, resulting in increased demand and generally higher prices.
One should keep in mind, however, that absent a significant spike in interest rates, it is unlikely that marginal increases in the target interest rate will independently result in a decrease in prices. During the December 2015 – November 2019 time period, when the target interest rate slowly increased from 0-0.25% to 2.25-2.5%, home prices continued to climb despite the decrease in affordability. This is likely due to the fact that although demand decreased as a result of less affordability, that decreased demand still exceeded supply (in addition to other economic factors including inflation, decreasing unemployment, etc.).
Similar to that prior period, we do not anticipate the upcoming interest rate hikes will result in the drop in prices that many buyers have been waiting for. The marginal increases in the target interest rate will likely ultimately result in higher interest rates, but those rates will remain historically low such that buyers will continue to enjoy significant buying power. We anticipate that it the rate hikes will put some downward pressure on the market, but not enough to offset the already booming market. In other words, we expect the market to continue to trend up, but not quite as quickly as the current trend.
If you are interested in learning more about this topic, or for more information on how Esquire Real Estate Brokerage can help you in the Southern California real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.
