Two-Minute Take: Interest Rates and the Housing Market

Learn more about J.H. Cullum Clark.
J.H. Cullum Clark
Director, Bush Institute-SMU Economic Growth Initiative
George W. Bush Institute

The Federal Reserve is considering slowing down interest rate hikes in 2019. What does this mean for home buyers?

Should the Fed decide to slow down its path of interest rate increases in 2019, how will it impact the housing market?

The Wall Street Journal reported that the Federal Reserve is reconsidering its prior intention of imposing three or more increases in its benchmark interest rate during 2019. This emerging caution on the part of U.S. monetary policy-makers reflects growing concerns about signs of economic weakness abroad and the potential impact of U.S.-Chinese trade disputes on the domestic economy.

All else equal, lower interest rates are good for homebuyers, since low rates mean buyers can finance a given purchase price with lower monthly payments. However, this is an oversimplification as lower rates also lead to higher home prices. Ultra-low interest rates in the United States over the past two decades have played a large role in driving home prices to historically high levels relative to household incomes, both during the housing mania of 2004 to 2007 and over the last five years. And higher interest rates over the last two years have caused a slowdown in the pace of price increases.

So, if the Federal Reserve hikes rates less than previously planned – or stops raising interest rates altogether – it may lead to a reacceleration in home prices.   

How will it impact low-income home buyers?

High home prices are good for sellers (provided they don’t turn around and buy another home) but bad for buyers. The high and rising prices of recent years have presented difficult challenges to first-time buyers, particularly younger, lower-income families. Home ownership rates among Millenials and lower-income Americans, particularly African-Americans, and Hispanics, have plunged over the last decade.

An end to Federal Reserve rate increases isn’t necessarily good news for these families if it fuels the upward spiral in home prices. What would help them most is a building boom to alleviate housing shortages in America’s thriving cities and towns.