10-Year Rally in US Home Prices to End When Fed Stops Hiking Rates, Says Yale Professor

10-Year Rally in US Home Prices to End When Fed Stops Hiking Rates, Says Yale Professor

UTC by Tolu Ajiboye · 3 min read
10-Year Rally in US Home Prices to End When Fed Stops Hiking Rates, Says Yale Professor
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Buyers in the US may find houses cheaper as home prices are expected to fall when the Fed stops its current tightening cycle.

The Federal Reserve’s decisions on interest rates would likely affect US home prices, according to a Yale University professor of economics. Professor Robert Shiller said that although prices have rallied for a decade, the rally could end once the rate increases stop.

Shiller explained that the interest rate problem affects many people and not just those looking to sell homes. As these rates rise, everyone wants to take advantage and make the most out of the hikes:

“The fear of interest rate increases has influenced people’s thinking – it’s not just the homeowners, it’s new buyers who wanted to get in before the interest rates went up even more…They wanted to lock in. So that’s been a positive influence on the market. But it’s coming to an end.”

According to the S&P Shiller US National Home Price Index (CSUSHPINSA), prices have steadily risen since 2012. In May, data from the Black Knight Home Price Index showed that US home prices rose 0.7% from April. At a seasonally adjusted rate, the increase was a record high.

Furthermore, home prices in May were 0.1% higher than they were the year before. Black Knight’s vice president of enterprise research Andy Walden said the 0.7% month-over-month gain points to an annualized growth rate of 8.9%.

Interestingly, US home prices fell last summer as the average interest rates for the 30-year fixed-rate mortgage jumped over 100% in six months. The fall persisted until January when prices rose again as supply fell.

Fed Interest Rate Hike to Affect US Home Prices

In early May, the Federal Reserve increased the interest rate by 25 basis points, the 10th consecutive hike in a little over a year. The decision pushed interest rates to the 5% – 5.25% range, the highest since August 2007. Following the increase, some Democratic lawmakers asked the Fed to suspend rate hikes for fears of job losses and a possible recession. As part of the statement announcing the hike, Fed Chairman Jerome Powell hinted that the regulator would suspend further hikes.

At the last meeting in June, the Fed did suspend hikes, stating that the suspension is necessary to “assess additional information and … implications for monetary policy.” However, a projection from the Federal Open Market Committee (FOMC) indicates nine members expect between 1 and 4 more interest rate hikes this year. Only two members believe there will be no more hikes until 2024.

Economists polled by Reuters say that the Fed will increase rates by 25 basis points at its next meeting on July 26, to a 5.25% – 5.50% range. However, most believe the upcoming hike would be the last of the current cycle.

According to Shiller, the increase in interest rates over the last few years has been “dramatic.” The professor believes that everyone feels it’s enough and a soft landing, however imperfect, is possible. However, Shiller says he’s not worried because the recent increase in home prices is likely seasonal, as these prices usually climb in the summer.

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