The Real Estate Market and Fed Interest Rates by Jennifer Viney

The Real Estate Market and Fed Interest Rates
by Jennifer Viney

The real estate market is cyclical by nature. From a narrow view, real estate professionals twiddle their thumbs every first quarter, waiting for the market to pick up as buyers are more inclined to shop in quarters two and three, and lenders are racing to close out financing in quarter four. From a broader perspective, real estate is intimately tied to the economy, legislative decisions, and Fed decisions that can cause years long booms or busts.

Right now, the market is seeing a significant downturn due to the Fed raising interest rates to combat seemingly ever-rising inflation. The Fed, founded by Congress in 1913 to stabilize the American banking system, was a relatively toothless institution, expected to be deferential to presidential policies for the first 50 years of its inception. This changed in 1979 when Paul Volcker was instated as Fed chairman and given wide latitude to create tight-fisted monetary policy to fight exorbitant inflation. Economists at the time believed this expansion of Fed power was temporary, but were proved wrong when Volcker’s successor, Greenspan introduced his own personal libertarian and laissez-faire ideology to the Fed, “cut[ting] interest rates and presid[ing] over a huge buildup in risk-taking” which led to the financial crisis of 2008. 1

Between 2000 and 2008 the 30-year Fixed Mortgage rate hovered between 5 and 8%, however in the years before the crash, buyers did not rely solely on the 30-Year Fixed Mortgage as lenders approved more and more “creative” financing, securing multiple loans to finance one home. In the years after the crash, the Fed cut interest rates and the government introduced expansive regulations through The Dodd-Frank Act and the creation of the Consumer Financial Protection Bureau. Because of these regulations, “creative” financing has fallen out of practice and homebuyers rely heavily on the 30-Year Fixed. In the 10 years post-crash, the 30-Year Fixed fell to around 3 to 4% as the market recovered from the crash. In 2020 during the COVID-19 pandemic, the Fed again lowered interest rates to historic lows and the 30-Year Fixed fell to 2 to 3% between mid-2020 and the end of 2021. These historically low interest rates resulted in sky-rocketing home prices. By early 2022 the demand for homes was still incredibly high and the supply in populous areas too low to sustain the demand.

With the Fed raising interest rates earlier this year to combat increasingly high and problematic inflation, and an additional expected raise in late September, the 30-Year Fixed is sitting at around 5.5%. While 5.5% might seem like whiplash from the 2.5% homebuyer’s received last year, it is still a relatively normal rate for the past 20 years. Those who were intimately aware of the 2008 financial crisis and the wide latitude Greenspan’s Fed had over the pre-crash era, see ghosts of a similar bubble in the COVID-19 and post-COVID-19 market. While there are similarities between that time and now – key differences, like higher regulations due to Dodd-Frank and a much shorter bubble, hopefully the market can weather the storm.

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1 Sebastian Mallaby, The Man Who Knew: The Life and Times of Alan Greenspan 5-6 (2016).