The housing market has been on a bit of a roller coaster journey in the past few years. After a relatively low period in 2020, rising inflation and sky-high interest rates have caused house prices to hit historic levels recently. Can the Federal Reserve get thing under control before we’re in for a repeat of 2008? There are a lot of ways things could go wrong in the housing market, and only a few ways that things could go right.
What Could the Fed Even Do?
The Federal Reserve, as the US’s central bank, gets to set the benchmark interest rate for borrowing costs. This doesn’t force banks to follow suit necessarily, but it can put pressure on private banks to get their interest rates closer to the Fed’s target.
Rate Hikes
The Fed’s historic rate hikes that started in 2022 were addressed at keeping inflation under control. That year, inflation briefly soared above 9% annually, a truly frightening number that saw the cost of nearly everything in the US economy skyrocketing.
Interest Rates Aren’t the Same as Mortgage Rates
It’s worth noting that the Fed doesn’t directly set borrowing costs for mortgages. Just because the central bank cuts borrowing costs, that doesn’t mean that the cost of buying a house will suddenly drop. It’ll take time for the market to adjust. And, frankly, the Fed has a lot of work to do to get things under control.
Prices Might Actually Go Up
Weirdly enough, prices can go up for houses when borrowing costs go down. This is because lower interest rates are good for buyers, which can lead to sellers trying to capitalize the upsurge in demand and the downtick in supply with higher prices.
More Homes to Build
Of course, if supply falls, home builders will pick up the slack, too. Luckily, it’s easier to borrow money when interest rates are lower, so this entire scenario is great for construction companies. This can help stabilize housing prices depending on the intensity of the demand.
History Repeats?
That’s exactly what happened in 2020, strangely enough, when the Fed slashed borrowing costs to near zero to keep the economy functional during the COVID-19 pandemic. The sudden drop in mortgage rates that year led to a sharp increase in the demand for houses that quickly outstripped supply and caused prices to skyrocket.
The Refinance Factor
There’s an element to lower interest rates that some people don’t think about: existing homeowners refinancing at better rates. This means that their homes aren’t entering the market as new properties for sale, but they’re instead staying locked up even though banks are reaping the rewards for the lower rates.
Nightmare Scenario
In the worst-case scenario, the price of homes could increase dramatically in the face of dropping interest rates. If supply far outstrips demand and many existing homeowners jump at the chance to refinance at better interest rates, then the Fed’s attempts to juice the economy could instead spur brutal inflation in the housing market.
Read More: 10 Ways to Know When to Refinance Your Home
What Could Go Right?
There’s a chance that things could go very well for the housing market, though. If the Fed carefully, slowly lowers interest rates and home builders can keep up with demand, the housing market could stabilize in a very healthy way going into 2025.
Read More: Federal Reserve Indicates Time for Rate Cuts is Now
What Can You Do?
For now, the main thing that a prospective homebuyer should do is just hang tight and see how things bear out. High interest rates are tough for homebuyers to stomach, so waiting for things to stabilize could help newcomers to the market save a lot of money going into next year.
Read More: 10 Things to Know Before You Refinance Your Mortgage
