Yale Professor predicts US home price rally to end with Fed rate hikes.

Yale Professor predicts US home price rally to end with Fed rate hikes.

How the Federal Reserve’s Interest Rate Decisions Could Impact the US Home Prices

The US housing market has experienced a decade-long rally in prices, but this significant growth may come to an end due to the Federal Reserve’s decisions on interest rates. Professor Robert Shiller, an esteemed economist from Yale University, emphasizes that the fear of interest rate increases has influenced not only homeowners but also potential buyers who sought to take advantage of low rates before they rise even further.[1]

The impact of interest rate changes extends beyond the housing market. When rates rise, everyone seeks to maximize the benefits before the cost of borrowing becomes more expensive. This heightened demand has positively influenced the housing market, but Professor Shiller believes this positive effect is approaching its end.[1]

The Steady Rise of US Home Prices

Data from the S&P Shiller US National Home Price Index reveals a consistent increase in home prices since 2012. In May, the Black Knight Home Price Index reported a 0.7% month-over-month rise, reaching a record high when seasonally adjusted.[1] Furthermore, comparing prices to the previous year, there was a 0.1% increase in May. Andy Walden, the vice president of enterprise research at Black Knight, suggests that the 0.7% monthly gain indicates an annualized growth rate of 8.9%.[1]

Interestingly, US home prices experienced a decline in the summer of the previous year. This drop coincided with a significant increase in the average interest rates for 30-year fixed-rate mortgages, which rose over 100% in just six months. The decline in prices persisted until January, at which point they began to rise again as supply diminished.[1]

Federal Reserve’s Interest Rate Hike Impact

In early May, the Federal Reserve raised interest rates by 25 basis points, marking the 10th consecutive hike in a little over a year. This decision pushed interest rates to a range of 5% – 5.25%, the highest level since August 2007.[1] Some Democratic lawmakers expressed concerns about job losses and the potential for a recession, leading them to request a suspension of further rate hikes. Fed Chairman Jerome Powell hinted at the possibility of halting future hikes, though the Federal Reserve statement did not explicitly commit to it.[1]

During the June meeting, the Federal Reserve did suspend interest rate hikes, citing the need to assess additional information and implications for monetary policy. However, projections from the Federal Open Market Committee (FOMC) indicate that nine members expect between one and four more interest rate hikes this year, while only two members predict no further hikes until 2024.[1]

Economists polled by Reuters anticipate a 25 basis point increase at the next Federal Reserve meeting on July 26, raising the range to 5.25% – 5.50%. Despite this projected increase, most experts believe this hike will be the last of the current cycle.[1]

Assessing the Impact of Interest Rate Changes

Professor Shiller views the increase in interest rates over the past few years as “dramatic.” Although he acknowledges the possibility of an imperfect soft landing, he remains unconcerned as he believes the recent rise in home prices is likely seasonal; historically, prices tend to climb during the summer months.[1]

In summary, the Federal Reserve’s decisions on interest rates have a considerable impact on US home prices. While the fear of rising rates has fueled demand and driven up prices, this trend may be coming to an end. The future path of interest rate hikes remains uncertain, but economists anticipate a final increase before a potential pause. Regardless of these fluctuations, it is important to remember that the rise in home prices may be influenced by various factors, and seasonal patterns can also play a significant role.


[1] Source: Cointelegraph