Could Higher Interest Rates Actually Help the Housing Market?


Divorce is the number two most stressful event in a person’s life, leading lady Leslie Knope reveals in one episode of “Parks and Recreation,” adding “Of course, marriage is number seven. So, watch out, everyone. It’s all bad.” 

We face a similar conundrum in the housing market right now. Housing prices have been out of control the last year, and in response, the Fed has announced it will raise interest rates this month. Rates have already surged to their highest point since March 2020 – the start of the coronavirus and its accompanying government damaging overreactions – showing that the salad days of 2% rates on a traditional home loan are over. 

The question for housing experts to answer is how significant that could impact the housing market. Could higher mortgage rates – by slowing the rising prices – actually be good for the mortgage market? 

Well, the answer is “Watch out, everyone. It’s all bad.” 

After the economic boom of the Trump years, America is now grappling with supply chain issues, inflation, outrageous gas prices, the ongoing damage of coronavirus extremism, and now actual war in Europe. America is experiencing the largest spike in Home Price Appreciation (HPA) since the 1920s – more than the run-up to Great Recession of 2008. It looks like there’s no end in sight and interest rates approaching 5% might not even impact appreciation for most homes. 

“It is everything happening from different angles. The middle class, even the upper middle class, is being squeezed,” Roy Black of Emory University’s Goizueta Business School told The Mortgage Note. “Prices are squeezing the people whose salaries are not increasing at the pace of the cost of living. About the only thing people can do is bargain-hunt until they find something or move farther and farther out where the rents are cheaper.”

There are plenty more details beyond that, but there are mortgage devils in every single one of them. Earlier this week, the American Enterprise Institute’s Housing Center released its monthly update on Housing Market Indicators, which aim to provide accurate and timely metrics that include Mortgage Risk/Leverage, house prices and appreciation trends, housing sales, and inventory levels. 

With better information, AEI hopes policymakers and exorcise some of those devils, but the situation is grim. Some of the data points they shared: 

·       Over the last 24 months, home prices have risen 31%.

·       November 2021 agency purchase volume was up 30% compared to 2019.

·       Active listings set a series’ low for January, down 30% from the already depleted levels of 2021.

AEI’s housing crew, Edward Pinto and Tobias Peter, insist that the Fed has to raise interest rates to get the unhealthy HPA down, citing California in general and San Francisco in specific. Indeed, their report (slide 18) illustrates that, while prices are booming everywhere, bad Blue State politics are fueling the rise, with so many people drawn to the Red State paradises of Florida, Texas, and Tennessee. Meanwhile, the markets in Las Vegas and Arizona are being adversely warped by Californians fleeing the once Golden State’s dysfunction.

Raise rates, lower demand, decrease out-of-control housing prices. economic research manager George Ratiu echoed the same idea, “With higher rates, there will be fewer buyers who can qualify for a mortgage this year, This is going to slow down demand and take pressure off fast-rising prices. The buying and selling process will begin to look more normal. We can expect to see less competition and more price reductions. Bidding wars are going to be behind us.”


There is an enormous problem for renters and first-time homebuyers that higher rates won’t affect, which is the recent trend of the super-rich and hedge funds buying up developments before normal people can even get close to them. If the devil is indeed in those details, this trend is the spawn of Satan. 

Hedge funds “come armed with the kind of financial firepower ordinary Americans can’t hope to match,” NBC reports, and “can outbid you by tens of thousands of dollars for that home of your dreams.” 

In Q4 2021, real estate investors bought roughly 80,000 U.S. homes worth a total of $50 billion, constituting 18.4% of U.S. homes purchased in the quarter, a record high, according to Redfin. Able to bid well over asking price – and, again, completely unaffected by mortgage rates because they can pay cash – renters. The billionaire tyrants at Blackrock are now the biggest landlord in America

Buying a home may not be as stressful as marriage or divorce, but it’s up there. There are a lot of factors making it worse for people right now if there aren’t some changes. Until then: Watch out, everyone. It’s all bad.