Interest Rates and Real Estate Prices

by Zach Petzoldt, State Certified Trainee Appraiser

April 2023

With the most recent Consumer Price Index coming in at 5% for March 2023, what does that mean for interest rates going forward? Despite this being 1% less than February of this year and the lowest since May 2021, the Federal Reserve continues to remain hawkish though as they are still hoping to get inflation under control.

Market Sentiment

Despite the Fed’s outwardly hawkish statements, the market believes that there are only one or two small rate hikes left before a several-month stall and eventual rate cut. The most recent predictions according to CME Group are that 88% expect a 25-basis point hike to 525 in May, and the remaining 12% expect no change. Over the rest of the year, less than a quarter believe that rates will be raised to 550, and a strong majority believes that rates will be reversed from where we are today by the end of year.

What This Means for Real Estate Prices

While interest rates and the Federal Reserve’s monetary policies are only one factor when it comes to real estate prices, interest rates are an important consideration, as most real estate is bought with the use of a loan. Typically, as rates increase, and the cost of payments follows, the number of potential buyers falls, hurting the demand for any given property. Even with rate hikes potentially on the horizon, property values will likely continue to have less growth in value or even a loss in value, as the US is likely to experience a recession due to the previous rate hikes. When rates do start to reduce at some point, the opposite will be true: as payments come down with interest rates, the number of buyers will increase. However this is much more long-term, and a few rate cuts will not be enough to improve market sentiment much in the likely case of some type of recession.

Don’t Fight the Fed

This is a common mantra on Wall Street and simply means to align your investments with the current Fed policies and their rhetoric instead of market sentiment or expectations. This is generally said to mean that someone should invest conservatively during rate hikes or higher interest rates and more aggressively during low-rate periods or cuts. Despite the market believing that rate cuts are near, members of the Federal Reserve Board remain hawkish as they have been put between a rock and a hard place. What I mean by this is that, as they continue to raise rates, the likelihood and severity of a potential recession grows, as well as the possibility of further bank failures.

While this is of great concern, the Fed also is well above their target inflation number of 2% and must continue to try to get this under control for domestic consumers, as well as to prevent further erosion in international faith in the dollar, and to maintain its use in international trade. The latter still seems to be more important to the Fed especially as China continues to gain support for the Yuan as a global trade settlement currency alternative to the dollar. Ultimately, market conditions are changing quickly and no one knows how much or how frequently interest rates changes are likely to occur. But real estate, especially in the long-term, continues to remain a good investment whether it is for income potential, a place to hedge against inflation, or for a potentially higher future resale value.

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