How Interest Rates Have Led to a Decline in Home Sales

A for sale sign sits in front of a home

Even if you’ve only occasionally paid attention to the news in recent years, you’ve likely heard a lot about both interest rate hikes and the cost of real estate. These two stories are actually quite intertwined. Interest rates have had a major impact on the cost of housing, which obviously affects home sales.

Here’s how interest rates that were intended to fight inflation also led to a decline in home sales in the final few months of 2022 and perhaps beyond:

What Are Interest Rates?

Interest rates, in this sense, refers to banks’ lending other banks reserve balances on an overnight basis, or called the Federal Funds Rate. The Federal Reserve, often called the Central Bank, sets the prime interest rate that banks borrow from the Central Bank or each other and is considered to be the lowest rate available. The Fed uses the interest rate to control the supply of available funds available to banks and ultimately borrowers. The Federal Reserve raised the interest rates on these loans seven times in 2022 and are poised to do so further another two times in 2023. While this is intended to fight against the inflation caused by the COVID-19 pandemic’s affect on the economy, it also has other consequences.

Affect on the Housing Market

With increased interest rates, come increased mortgage rates. This shuts a certain number of buyers out of the market and cuts down on what other buyers can afford. This means there is now a smaller pool of potential buyers, causing decreases in both the amount sellers are able to charge and the number of homes sold. This is further compounded by households with low interest rates unwillingness to move due to low mortgage payments, which also contributes to a housing shortage. Despite a shortage in housing, residential developers and builders are often the ones that are affected as they have to move their inventory. This ultimately leads to concessions and declines, which the rolls into overall home values.

The S&P CoreLogic Case-Shiller National Home Price Index, which measures home prices across the United States, fell 0.6% in November, compared to October. This is the fifth consecutive month of decline by this measure. Meanwhile, existing home sales fell 17.8% in 2022, all the way to their lowest level since 2014.

So, What’s Next

It’s logical to assume this trend continues for both December and January, but what comes next is less certain. The Federal Reserve is expected to continue to raise interest rates throughout the early part of 2023 at least in a continued effort to fight inflation. However, mortgage rates have already begun to fall from a peak of over 7% on average to close to 6% in recent months.

Still, affordability remains an issue. An index created by the National Association of Realtors to measure home affordability rose from 95.5 in November from a decades-long low of 91.3 in October, only after falling from a pre-pandemic level of 162. However, limited supply and a large number of people motivated to buy a home could mean that home sales may not decline dramatically, unless drastic changes occur, such as stock market declines, more wars, or major bank failures, etc.

If you’re wondering how the value of your home or commercial business has changed amid increased interest rates, Atlas Valuation can offer you a professional appraisal. Our experts specialize in everything from legal disputes to purchase negotiations to estate closure and more. Call 334-737-6993 to get started today.


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